Asset managers’ products rarely surprise anyone. You’re an equities specialist? You’ll have US, European, UK, emerging markets funds, maybe Japan. Fixed income? I’ll choose from your treasuries, gilts and Eurozone products, investment grade and high yield, maybe local currency emerging markets. There might even be some convertibles tucked away somewhere.
LFP has the plain-vanilla stuff, too. Its Long Term Bonds, Mid-Term Bonds and Emerging Bonds do pretty much what they say on the tin. But without even considering its parent group, UFG - whose main business is €6bn in real estate assets, but which also works in vineyards and fine art - things get more and more unusual the longer you peer into LFP’s shop window.
Take the EM Impact Europe fund, for example, a portfolio of European companies selected for their emerging market revenues: that was well ahead of its time when it launched in 2004. The same might be said of LFP’s first thematic fund, Trend Prevention, launched in the aftermath of 9/11 to focus on companies working in defence and various areas of IT, data, financial, resource and individual security.
Sure, thematic fund managers are two-a-penny nowadays. And even products like Long Volatility or Elixime Volatilité 3, an options-trading strategy and a kind of global macro rates and FX programme, respectively, would not look out of place in the hedge fund world. But where else would you find something like Protectaux, which actively trades long-dated euro-zone rates over the top of a structural short 10-year Bund futures position? As a structured product from an investment bank, maybe. But as a fund strategy?
“We do plain vanilla,” says head of international sales development Jean-Philippe Besse, “but our big ambition is to bring innovative diversification concepts to institutional investors.”
To understand the products, it helps to understand the history. UFG-LFP Group was formed in 2009 when UFG, a €24bn big French brand name owned by Crédit Mutuel with a long history managing real estate and fixed income funds for the domestic retail market, acquired LFP, which had been providing funkier products for institutions since 2000.
The client mix was clearly great for the new firm but the investment cultures melded more easily than one might have expected, too: “The organisation was set up in just four months,” says Besse. “Merging the funds took just six months.”
The firm likes to talk of a ‘merger’ rather than an ‘acquisition’, and this is not just about rebranding all the funds ‘LFP’. Xavier Lépine, Patrick Rivière and Alain Wicker, UFG-LFP’s senior management, go way back together. Wicker founded Fimagest in 1985, where Rivière joined him from Cholet Dupont. Fimagest was eventually sold to Fortis in the mid-1990s, where it acquired FP Consult, a firm set up by Lépine. Wicker went on to found LFP; Lépine moved on to UFG and Rivière joined him there in 2008. The ‘merger’ was a reunion of old friends who, in the words of Philippe Mimran, LFP’s CIO for long-only asset management, “share the same view and spirit”.
At the heart of that is what UFG-LFP calls ‘Asymmetrical Management’. “If you resist the downturns relatively well you don’t need to generate such high returns in the up-markets to beat the benchmarks or your peers,” says Mimran, who is responsible for all of LFP’s products except its funds of hedge funds.
It is an idea whose stock has risen since the 2008 market crash, even in a collective pensions world increasingly focused on shorter-term mark-to-market risk and solvency management, and a defined contribution world busy trying to define the best form for its default funds (UFG has set up a centre for research on dynamic asset allocation in lifecycle funds with EDHEC).
So what does it mean in practice? “When you choose your assets you will certainly have more alternative investments,” says Mimran. “Funds of hedge funds; convertibles; index-linked bonds, which by nature have this asymmetrical character; long-volatility strategies. But the key thing is that you will not be benchmarked: while we might list benchmarks for clients we never calculate tracking error.”
LFP’s funds operate with risk budgets - variously defined, but typically a volatility target (like the eponymous one for Elixime Volatilité 3). Its Emerging Bonds fund has a maximum target volatility of 10%, for example, so if market volatility spikes LFP will turn to cash. For the Emerging Leaders equity fund the target was to capture most of the return to emerging markets but with DJ Euro Stoxx 50 volatility.
It is no surprise to see this philosophy emerge from what was essentially a fixed income culture, where the upside is necessarily capped and the downside absolute, and where the standard benchmarks make little sense. And, indeed, it paid off most spectacularly in credit through the 2006-09 period.
“In 2006 and 2007 we decided that the incremental returns coming from credit were simply not worth the risk that had built up,” says Mimran. “So our UFG money market funds had no ABS at all, for example. That meant we held up well through the crisis and were able to put a lot of money into credit at the beginning of 2009. The fact that we are not benchmarked meant we could go from close to zero in credit to full-speed ahead.”
One product launched in late 2008 specifically to exploit risk-adjusted opportunities across financial company balance sheets, LFP Libroblig, finished 2009 up almost 30%; and LFP Opportunity, the firm’s euro high yield fund, got away with a 25% loss in 2008 before returning almost 50% the following year. “It was all about not being destroyed by the crisis,” says Mimran.
Flexibility to adapt to the changing nature of risk comes through in the recent history of its European sovereign bond strategies, too. The standard Long Term and Mid Term funds were joined, in 2009, by LFP Euro Sovereign Bonds, designed explicitly to exploit intra-Euro-zone yield differentiation on the basis that the common currency makes sovereign default less likely. But this was less about punting on the survival of the euro than about recognising peripheral euro-zone debt as a new, separate asset class.
“In early 2009 we had to decide whether we wanted these bonds: the portfolio managers wanted them; the directors said it was too dangerous,” Mimran recalls. “The deal we made with clients was to cut back while launching this pure fund for those who needed to maintain global exposure.”
After returning 7.3% between its launch in March 2009 to the end of that year, it lost 5.4% as the situation worsed in 2010. More discussions with clients ensued, and exposure to peripherals was limited until the appearance of the European Financial Stability Facility (EFSF). “We took that to mean that these bonds were safe for the next three years, so we limited our investment in these countries to 2013,” says Mimran. “Again, you can see that this is nothing to do with benchmarks and everything to do with protecting clients from a new risk.”
This illustrates an interesting point about LFP. It manages broad portfolios that are downside risk-managed, extending to multi-asset products like LFP Allocation (which has an investment in LFP Librobolig) and even to a product called 5 Stars Absolute Return, a multimanager balanced strategy that invests in LFP and external funds. These sit alongside a whole range of managed-downside, low-volatility yield-type products, from Index Variable and Index Long Term to Elixime Volatilité 3. But it also provides very specific products that help investors achieve particular exposures or manage the downside risk of their own portfolios, like Long Volatility and Protectaux, which seem to inhabit a very different universe. The former seem like core products, the latter satellites or hedges.
Not so, says Mimran. “In every case, these products must be successful in themselves. The goal is always to outperform plain-vanilla products but with less volatility.”
This concept is familiar to those involved in long-biased volatility trading, who manage to control theta costs by buying option cheaply and trading gamma. LFP does this in its Long Volatility fund, and uses a similarly active approach in Protectaux, around its structural short 10-year Bund future position.
“Protectaux is not merely a hedging tool,” Mimran explains. “The Short JPM German Bund index is our benchmark and at any time the duration of the portfolio will be two years above or below that. The minimum level of portfolio negative duration will always be implemented with 10-year Bund futures, but the incremental short in excess of that can be done with the 10-year, the two-year Schatz, the five-year Bobl, the 30-year: so we manage both exposure and the curve to outperform the straight short Bunds position. In 2010, we started out with duration a little longer than the benchmark as yields continued to edge downwards, and then played the flattening of the curve by shorting the Schatz. In 2011, we are sticking to the benchmark duration as pressure on yields continues.”
In this light, the thematic equity products, starting with Trend Prevention in 2001, begin to make perfect sense in among all the fixed income and macro ideas. Like all the best thematic investors, LFP begins by identifying a downside risk - to the economy and to traditional portfolios - before managing protection against that risk as a pro-growth strategy.
The mantra of benchmark returns with lower volatility sounds very Franco-German - these have always been the markets where equity structured products have enjoyed favour. LFP is just beginning its attempt to take its products to investors outside France, starting with Luxembourg, Switzerland, Spain, Italy and Belgium, where it is hiring new staff and opening offices. Besse says that Germany is on the agenda for later in 2011 (“Our local partner is very enthusiastic about the reception we can get for products like our short-term bond fund”), and a salesperson for the Nordics is also being recruited (“If we come away with only 0.1% of that market we will be happy”).
Will it succeed? LFP’s is not the easiest story to tell. But its shop window is so full of intriguing things that an investor would have to be mightily incurious not to want to take a look.