Refocusing on risk
After five years of growth the recent market turmoil is leading to a strategic reassessment on the part of asset managers in France. Nina Röhrbein examines the emerging trends
Like other global markets, France was shaken by the recent market turmoil. And the crunch has had a major impact on the country’s institutional asset management scene.
“We may be at a turning point in asset management as after almost five years of growth, investors feel less confident about financial instruments,” notes Gilles Glicenstein, chairman and CEO at BNP Paribas Investment Partners. “And this has led to a aversion to high risk. We had a record year in 2007 in terms of results and growth and launched new activities, especially in private equity and infrastructure. But since the beginning of this year, money markets in particular have been extremely volatile, which has not been good for our business. However, we are still optimistic of seeing a change later in the year.”
“Risk-monitoring has become a key asset following the credit crisis,” says Jérôme de Dax, deputy general manager sales and marketing at Société Générale Asset Management (SGAM). “However, investors do not want to reduce risk, but have a clear assessment of risk and liquidity.”
He adds: “The turmoil and the dramatic lack of liquidities it implies even for well rated ‘papers’ has severely impacted on our dynamic money market strategies, and that is why we have suffered in this area,” he adds. “But on a positive note, this has led to a return to a demand for strong risk-monitoring, a flight to security and an emphasis on quality, where SGAM has been traditionally strong.”
“Investors are ready to go back to basics and look for products with transparency,” says Sandro Pierri, (pictured above right) head of Europe and Latin America at Pioneer Investments. “Although it is a slow process, it is a major trend so from an asset manager’s perspective we try to match this change for our clients by investing in research, risk management, transparency and communication.”
The credit crunch has also led to new market trends. “Investors have lost confidence, particularly in dynamic monetary funds,” says Pascal Blanqué, (pictured left) CIO of Crédit Agricole Asset Management (CAAM) Group. “Liquidity is back as a critical concept and transparency has also become a key issue. One of the lessons of the crisis has been that investors invest in what they comprehend and this is providing the impetus for easily understandable products. We see momentum on alpha and beta because they can provide simple access to a wide range of pure strategies.”
“The core-satellite approach is very important and is being used to reshape balanced portfolios,” says de Dax. “The bulk has shifted from dynamic to plain vanilla assets with a low risk level and tracking error. The more aggressive and diversified satellites are being used for alpha generation and consequently alpha-beta separation and portable alpha are gaining importance.”
“With more caisses de retraites expected to merge in the next few years, investor portfolios will expand and be more likely to adopt a core-satellite architecture,” says Sylvain Favre-Gilly, (pictured right) senior client relationship officer at BGI in France. “The core-satellite approach is already a reality with half of French institutions. The mergers are also expected to lead to a focus on passive management and high alpha. The more institutions look at alpha-beta separation, the more they understand that 90% of their portfolio performance comes from beta, which leads to greater demand for such asset allocation products.”
“Although, some models have been constrained by the illiquidity resulting from the credit crisis, it has created an opportunity for us to pursue our alpha-beta separation philosophy,” adds Favre-Gilly. “This is being helped by investors wanting to understand the risk they are taking and being more efficient in selecting their exposure and in their risk budgeting. They buy products with a structured approach and top risk-control tools.”
“From a purely institutional perspective, we have been mainly in the equities space,” says Pierri. “And despite the market correction, we still have a very positive view on equities. They will still be an important asset class for long-term, liability-driven investors so our approach has not changed. For us the focus has been, and still is, on emerging markets as well as European and global equities. But some investors are now redeeming out of the money market and have also reduced their allocation to equities. They are looking for new ways of allocating with lower risk such as plain vanilla, money market funds with Euro Overnight Index Average (Eonia) performance targets.”
“For cyclical reasons, volatility products have proved successful over the last 18 months,” says Blanqué. “Volatility is increasingly seen as an asset class in itself for structural reasons and we have experienced strong demand for our equity volatility products that provide pure exposure to volatility. That is why we have extended our investment universe to global equities that can exploit a new source of volatility outside Europe.”
“We see money markets just as a tactical way of parking the increased cash that is coming out of a reduced allocation in equities,” Pierri adds. “We feel when the market stabilises again - which could be in the second or third quarter - investors will start increasing their allocation to riskier assets over a longer time horizon, both in equities and credit. Combining non-correlated alpha sources with beta in order to optimise portfolio construction has become important. Portable alpha solutions are also needed for asset managers to remain competitive in the next few years.”
Hervé Thiard, managing director at Pictet in Paris, agrees. “We have the feeling people are looking for more index-linked tracker funds as it is very difficult to add alpha this year,” he says. “Due to the market’s volatility, it is more about catching beta than alpha. People are also looking for non-correlated themes, which could present good opportunities for us and our biotech, water, generics and clean energy funds.”
He adds: “We expect investors to try to catch beta through index funds and alpha through the growth story. We also assume absolute return plans and products with low volatility will do well. Our absolute return fund, which was launched in 2005, for example, did very well during the subprime crisis, as it did not contain any exposure to credit and a portion of its subscription cam from credit redemptions.”
But Blanqué disagrees. “Absolute return strategies have been challenged during the crisis,” he says. “It is a discriminating period for them and the weakest providers will probably disappear in this risk-driven period of intense scrutiny.”
“Third pillar pensions solutions are absolute-return driven,” says de Dax. “And while too much diversification has become a problem on fixed income, diversification through emerging markets is still popular and has produced attractive yields.”
“We always try to focus on assets that add value and are not overcrowded,” says Glicenstein. “Infrastructure, for example, is not a new asset class, but there is a growing demand for it due to its visibility and returns, while few fund managers aside from the Australian bank Macquarie have a track record in it. We are also in the process of setting up new activities in the Middle East and have already seen rapid growth in countries such as China, India, Korea, Malaysia and Japan. So far we have not seen any more volatility in emerging markets than in industrialised ones. However, if the growth rate slows in global market economies it will also affect emerging markets.”
Pictet Asset Management has already launched a Russia fund. “We are to launch a Middle East and North Africa fund and transform our telecoms fund into a digital telecoms fund based on new technology too,” says Thiard.
He adds that the advance of alternatives has been triggered by legislation last year - which removed some of the allocation constraints - as well as by the resulting subprime losses on the enhanced money market.
“Despite a terrible year, subscriptions to alternatives have risen by almost 50% from €26m at the end of 2006 to €38m at the end of 2007,” says Thiard. “Alternatives are the real winners of the credit crisis, as their trend does not depend on a short-term cycle. In fact, when bubbles burst and the stock exchange is bearish, more investors look for opportunities through alternatives. Their growth is the result of institutional investors who continue to diversify through hedge funds, funds of hedge funds, private equity funds and fund of private equity funds. A survey in mid-February stated that while 11% of French institutional investors want to reduce their allocation to alternatives, 57% would like to increase it, with 90% of investors having confidence in alternatives.”
Blanqué confirms that there is more interest in alternatives, with institutions increasing or maintaining their exposure. This is mainly through fund of hedge funds, due to their rate of return profiles and diversification potential. “Hedge funds performed well, especially during the crisis,” he says. “However, we are still in the early stages of investigation with regard to infrastructure, private equity and commodities - basically the new sources of beta.”
“There is still no huge demand for alternatives, although it is growing” confirms de Dax. “Our aim is to educate and advise clients on diversification as institutions are still conservative and fixed income-focussed in their asset allocation. Shifts are progressive but small scale.”
“The story of France is the story of public debt, while retirement products mainly consist of low-risk, low-return products, ” adds Thiard, “We are only very slowly moving away from it. We expect 2008 to be a tough year, as the appetite for risk has decreased. While the caisses de retraites continue to have a constant inflow of assets, banks and insurers - who are the majority of our clients - have to cope with redemptions and reduction of flows. And due to the increasing risk-adversity, people may even return to old-fashioned investment styles and saving plans with more traditional execution.
“Any allocation to alternatives will come at the expense of fixed income,” he adds. “We also expect equities to suffer further due to cyclical reasons.”
According to BNP Paribas Investment Partners, SRI is another long-term trend. Last year, the asset manager even took a 29.4% stake in UK specialist finance house Impax, which focuses on the market for cleaner and more efficient delivery of utilities.
“We have believed in the SRI approach for eight or nine years now, mainly because we felt that our clients wanted to have more input in the way their funds were invested,” Glicenstein says. “But we do not see all of our traditional competitors in the SRI market despite some large institutional clients.”
HSBC Investments currently offers four SRI funds: International equities, European equities, European fixed income and a balanced fund. “Most of our institutional clients are focussed on European equities,” says Xavier Desmadryl, (pictured left) global head of SRI research at HSBC Investments in France. “But we are starting to see demand on international equities because investors want to diversify their portfolios and look for global solutions as European markets are more mature. We are also working on emerging market SRI funds for institutional clients and have already launched a Brazil SRI fund. In addition, we intend to launch a global emerging markets concept.”
“We are strongly positioned on SRI with our global ecology and sustainable strategy and we plan to push further in that space,” says Pierri.
“We also notice rapid growth of ETFs although generally speaking, the market share of passive investment is still low in the French market,” Glicenstein adds. “Like SRI, ETFs are a long-term trend that tend to either help build a core portfolio or bring some overlay whenever an investor wants to have exposure to a particular market.
“On the structured asset side, we have set up an ETF joint venture with AXA, known as EasyETF. We have also teamed up with US-based Federated and UK-based Henderson to offer AAA-rated, liquid money market funds in US dollars, sterling and euros, so we sometimes work with competitors in this highly fragmented market.”
According to Blanque, competition is particularly strong in equities, with a large number of small houses challenging the bigger ones. “However, due their concentration on one style or asset class, some of them have been weakened by the crisis,” he notes.
BGI says that to retain its place in the fiercely competitive French market, it aims to be strong in a few areas such as indexes/ETFs, hedge funds and money markets. “Beta management is often done through ETFs or pooled or segregated funds,” says Favre-Gilly.
“France is a very sizeable and developed market from an institutional perspective but competition is most likely to increase in areas such as alternatives,” notes Pierri. “We believe that for global players like us the increase of consultant-driven selection will also give us a competitive advantage because we deal with global consultants on a global scale.”
So what are the challenges ahead?
“Our main challenge is to be able to deliver more requests for proposals as I see a lot more RFPs in the next few years,” says Favre-Gilly. “Another challenge is to address all client needs in terms of offering pure beta and high alpha solutions within UCITS III constraints in France.”
“We have a 10-year strategy based on each aspect of asset management, whether it is by product or geography,” says Glicenstein. “We will try to follow our long-term strategy but if market conditions are really difficult we might adapt our strategies for 2008 in order to preserve our profits.”