John Lappin reports on the changes

The French asset management industry is fast reorganising, as the major domestic players set out to establish their European credentials, building on a significant home market position.

While the market obviously lacks that mainstay of any institutional market, a pension fund system, there are still significant sources of funds. Institutional investors comprise the pay-as-you-go Caisses de Retraites which may have reserves to invest, local banks, smaller insurers and companies. The latter invest in some schemes designed to remunerate senior management, while corporate treasury departments have invested, particularly in the difficult economic situation of recent years, in short-term products. The concentration of these assets is overwhelmingly in bonds and money market funds but there is a move to equity investment. In addition, and partly as a result of the lack of pension funds, France has the second largest mutual fund industry in Europe.

Recent changes in asset management show a market moving closer to what is perceived as the Anglo-Saxon model, but the description should be used with caution. The profile of consultants, for example, in the last three years has increased but opinions vary over the extent to which there is room for all the major players to prosper. In addition, France can be firmly placed within the continental context of institutional investment. French investors will increasingly diversify into non-domestic equity but bonds will continue to feature to a greater extent than, say, in UK portfolios.

Frédéric Jolly, président directeur général of Frank Russell in Paris, says: Clients are looking much more to the philosophy of the investment process but the brand name is still very important. They like security and associate this with size."

He adds that five years ago management fees where a key criterion but that investors are now accepting that active management may cost more. Institutions are also closely scrutinising risk control management as portfolios' equity portions increase.

François Sibilia, vice president of Morgan Stanley Asset Management in Paris, says that French investors are sophisticated in certain ways, but less so in others. There is an awareness of the latest asset liability and optimisation models, but not of other issues such as growth versus value investing. "France is very sophisticated in terms of the products they use, but they are less complex when breaking investments down to a lower level of granularity," he says.

Alain Leclair, vice-chairman of Pari-bas Asset Management, says: "The big change came three years ago, when French actors began to give money out to third party managers. Since then that trend has been very fast under the pressure of consultants. The way we deal with this business has changed with beauty contests on the Anglo-Saxon pattern."

That said, the consultancy market remains relatively small. Frank Russell, for example, says that while it sees itself as market leader in investment consultancy, it would welcome more competition, preferring a smaller share of a larger, better informed marketplace.

Mercer, viewing the situation from its Paris office, does not see the growth of RFPs justify a specialisation in the area. It has however benefited from consulting on human resources for restructuring in the asset management industry. This is one of the major changes to the domestic industry itself.

Leclair, who also chairs the French asset managers' association, explains that a new law was agreed between the industry and French regulators in 1996 to separate out the asset management function. "In 12 months, 90% has been transferred from banks and insurance companies into dedicated subsidiaries. This is a major change. In one year the work has been done. The industry has moved forward very fast." This restructuring has also given rise to a great deal of competition for asset management expertise. "In terms of size of assets under management - and who is gaining visibility - the major players are Indocam, CDC, Société Générale, BNP, Crédit Lyonnais, CCF and AXA-UAP and then you have second-tier players like CPR and Fimagest," explains Jolly. "I would say that the French market is quite concentrated. The 10 biggest players in the market manage something like 70% of assets under management."

However, he fits this into the overall European picture. Says Jolly: "The big issue today for French managers is that they are too big at the level of small manager but too small to be at a global level."

The biggest, says Jolly, has $140bn under management. AXA is different. "It is the only French financial institution which is really a global institution with $500bn under management and operations in the US, Asia and Europe. The French banks want to become more international and are all targeting clients in Europe offering European equity management to Spanish, German and Italian clients. Some companies have a clear strategy forthis."

Significantly, Jolly links success in France to success elsewhere. "Our opinion is that the key players in France will be those who are successful in becoming more international."

The French banks, setting out their strategies, seem to be largely in agreement with Jolly's assessment.

Gilles Glicenstein, senior executive vice president of BNP Gestions, says: "In terms of asset management for institutions we don't have agreed statistics, but for mutual funds we are number three, representing approximately 8%. We feel we are one of the most dynamic. In equity and guaranteed products we have the most competitive size.

"SocGen declares Ffr580bn ($96bn), we say we manage Ffr450bn, Crédit Agricole IndoSuez Ffr600bn, but there is no way of checking these amounts," he adds.

On his European strategy he says: "Our strategy is not oriented to size but to differentiate ourselves in terms of products we can offer. We know the European mentality. Apart from this in Asia and emerging markets we are establishing an expertise. We know this is not the strategy followed by our European competitors but we will not adopt the reverse takeover strategy nor the market leader strategy."

He adds that he does not see any European manager offering global mandates. "The competition is going to be in European equity but that story isn't written yet."

Jérome de Dax, director of institutional investment at Société Générale Asset Management (SGAM) is unequivocal about the bank's ambition to be a global player: "We want to be one of the major or the major asset manager in Europe five years from now and to be in the top 20 in the world. To succeed we have to be successful in managing assets in our domestic area, which up till now was France and will now be Europe.

"If we are very strong and respected with a high name recognition, fund managers, research, sales force and client servicing, we will be strong outside Europe. If we can show clients in other parts of the world that we have a top position in Europe our credibility will increase.

"We will look for buy-side bottom-up value, with real added value with a large number of stocks in a European universe. We won't do that without increasing the research capability and we are on the way to doing this."

Jean-François Pinçon, head of institutional sales at Indocam Asset Management, which he places among the top in France and 14th in Europe with $124bn under management, says: "The major trend is to be either a very big house or a niche player. I don't think there is a big future for companies in between. The company that tries to be a global house without having the size, in the long term will fail. In Europe there is a race for client business, not only domestically but also cross-border."

Everyone is trying to be a player in this area. "In France and in Europe, the asset class where the competition is most killing is definitely European equity. British, French, Dutch, Swiss, German can all claim to be a European equity manager." He believes that continental houses will regain ground from UK ones, but that the major threat is from the US houses.

Of the French banks, Paribas has greatest claim to global reach, at least in terms of clients. Noting that Pari-bas separated its asset management function 15 years ago, Leclair says: "We manage about $60bn of which two thirds is for non-French clients making us different in terms of structure." He also points to the fact that Calpers is one of Paribas' clients.

"We are ahead in terms of the pan-Europeanisation of the portfolio. We are very advanced in the internationalisation of asset management and are ready for when all stock markets and bond markets are denominated in euros."

Global players, still have a relatively low market share, but strongly believe that events from the euro to the development of pensions will favour them.

"The most active foreign players are Invesco, JP Morgan, State Street, and recently Crédit Suisse. I would say there are about 10 foreign companies but they are still very small. I think the biggest foreigner is JP Morgan, and the others have less than Ffr10bn," says Russell's Jolly.

From the international perspective, James Tanner, managing director of Morgan Stanley Asset Management, believes that banks and insurers are gravitating towards asset management as a primary strategic focus. "They are pulling assets out of the balance of the organisation, putting a ring around it and saying we are a major player in asset management."

The international players are in demand for their global reach and the ability, according to Tanner, to "take a global approach to managing money against certain benchmarks and to pick stocks and bonds on a global basis".

Its approach to France fits into a European strategy where the bank is trying to offer the same sort of vehicle across Europe in anticipation of eventual harmonisation. The ease with which this can be done varies, depending on the openness of the country, with Tanner placing France somewhere in the middle.

Jean Echiffre, marketing director at State Street Global Advisors in Paris, points to the fact that many local insurers and asset managers are using their services, as a reason for optimism about future market share: "Our clients are mainly insurance companies, retirement institutions and other portfolio managers. The big insurance companies in France are very big and have global capabilities in a lot of countries and are comparable with the asset management firms who in France have a good size, and have developed good capabilities of management but they use State Street for the part of the job they cannot do themselves."

Assessing their abilities, he continues: "Most people can manage a CAC40 but it is difficult to manage an outside country, a G5 indexed fund or an MSCI world index with 1,500 stocks. You can find very good stock pickers or country allocators but for an enhanced index there is no competition in Europe. Also institutions are not sophisticated in a balanced portfolio over countries, with control of risk, tracking error and costs."

As with the domestic players, Morgan Stanley identifies Europe as a major area of competition but Tanner suggests that there are few genuine European players. Looking at mutual funds he says that of the major fund groups, only two in the top 50 European managers take over 5% of assets from two countries other than their home country. He also believes that houses experienced in providing alpha on the highly competitive US bond market, will prosper in a Europe without currency risk to the detriment of some local players. In equities sector-based analysis players will clearly prosper.

In answer, de Dax of SGAM says: "With the entrance of Anglo-Saxon managers, they are putting pressure to quickly increase the standards in the strength of investment process and the quality of research but that is positive. If we reach the international standards, and we have research, process, human resources and reporting, then the credibility of an asset manager based in continental Europe is greater than one based outside."

Leclair of Paribas accepts the threat from international players but sees certain French strengths, among them price competitiveness. "There is a language barrier, the particularity of each market, specificity of the tax systems, but the big barrier represented by the management of the currency risk will be removed and the second largest asset management market in the world created," he adds.

"On the European side, a big asset management force has been put to-gether to service the mutual fund market and we have the troops from the front office, mid office and back office ready and eager to compete. We are setting up pension funds. But if you look at the mutual fund segment in the US which has seen fast growth this has been because of the 401k plans, so there are reasons for optimism."

The French, he says, should prove more skilled than others in Europe in the quantitative approach, being "in some respects closer to the US school of management than for example the Bri-tish top-down economic approach".

However, pension funds remain an unknown, dependent on political developments, although managers agree that this change must come.

The effectiveness of the reform remains unclear but one investment banker takes a bullish view. Tanner of Morgan Stanley points out that France moved very rapidly from having a very arcane bond market in the mid-1980s to having one of most sophisticated by adopting best practice from other countries.

The same thing, he says, could happen with pension funds: "If the government and regulators get it right, France could be leagues ahead of other countries. We have seen them dither on pensions, but when they do come out with a change they can put all their weaponry behind it. We are hoping this will be the case."