France: Paving the way for responsible investment

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The Fonds de Réserve pour les Retraites has undergone a radical strategy reshape following the 2010 pension reform and volatile equity markets in 2011. And 2013 will be action-packed, writes Cécile Sourbes

The past few years have been difficult for the Fonds de Réserve pour les Retraites (FRR). The fund not only had to bear the brunt of the 2010 pension reform, but it also suffered a major loss (€1.9bn) in 2011.

The most significant move came in November 2010 when the parliament enacted a pension reform. At that time, FRR, which was launched in 1999 and received contributions from the state, saw its investment horizon suddenly shrink. The government decided that the FRR would no longer receive income but would instead have to make annual payments of €2.1bn to the Caisse d’Amortissement de la Dette Sociale (CADES) – used to refinance the debt incurred to pay pensions – until the fund is wound up in 2024.

This radical shift pushed the fund to introduce a new liability-driven investment (LDI) strategy. Jean-Philippe Olivier, head of the delegated management department at FRR, explains: “The strategy aimed at introducing a hedging portfolio – which represents 60% of the total size of our portfolio – to offset our liability constraints, as well as a return-seeking portfolio, representing 40% of our total portfolio, to ensure sufficient returns until 2024.”

However, this new investment strategy did not prevent the fund from posting a huge 14.5% loss in European equities in 2011.

Fortunately, FRR ended 2012 on a more positive note, posting a return of 10.5%. The fund attributed these results to the strong performance of its return-seeking portfolio, as well as to the fall in sovereign bond rates and the yield premiums on non-sovereign bonds, which have enabled the hedging component to post a rise of 10.1%.

“With our new LDI strategy, we have gradually raised our exposure to more diversified assets, such as emerging market debt, which offer an attractive risk/return profile,” Olivier says. “We have also allocated capital to some listed real estate assets as part of our diversification strategy.”

However, even though FRR is return-oriented, it is aware of its duty as a responsible investor. The FRR, which adopted an SRI charter as early as 2005, aims to draw up an appropriate set of environmental, social and governance (ESG) criteria.

According to Mickael Hellier, head of the responsible investment strategy for FRR, the fund has set up a sort of “experimental laboratory” to analyse how to implement its SRI charter and find the most appropriate asset classes within its portfolio to apply ESG criteria. This laboratory consists of FRR itself, the fund’s asset managers, as well as a team made up of external SRI research providers.

Hellier says that the implementation of the ESG criteria applies to the whole portfolio but to varying degrees. “As part of our SRI charter, we promote responsible investments but we also have some economic imperatives,” he says. “Therefore, some specific funds within our portfolio, such as SME equities, apply a much more in-depth SRI analysis than the mainstream ones.”

Hellier also explains that FRR applies such in-depth analysis to pre-determined asset classes and often shifts its focus. While the fund has already conducted an in-depth ESG analysis of its large-cap equities portfolio, it is now taking a similar approach for its small and mid-cap equities. In December last year FRR appointed three asset managers – AXA Investment Managers, Financière de l’Echiquier and Kempen Capital Management – to manage a €200m small-cap mandate, which encompasses ESG criteria.

This is not the limit to the ESG drive. This year the fund is planning to select fund-of-fund managers to run a €100m mandate investing in waste-water plants and other sustainable enterprises.

Hellier explains that the new mandate will allow FRR to develop a new central theme for its investment strategy.

“The theme will focus on sustainable development,” he says. “We will work closely with the asset managers selected to identify our investment opportunities in companies that can develop efficient renewable-energy power plants, such as wind turbines, waste-water plants and photovoltaic plants.”

This mandate will be for three years, which, say Olivier and Hellier, will enable the fund to evaluate whether or not the ESG criteria fit within this renewable energy asset class.
FRR is also retendering other sections of its portfolio. The fund plans to select new asset managers this year before the expiry of a number of mandates in 2014.

The tender processes will include a mandate focusing on European small and mid-cap equities and one focusing on global equities especially in the US and Japan.  

“This will come alongside the selection of new SRI research providers, who will help us extend our knowledge in the responsible investment domain,” Hellier concludes.

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