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Impact Investing

IPE special report May 2018

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Specialists take their turn

Specialist investment managers offering dedicated investment funds are likely to be the main recipients of future growth in French institutional assets, according to the first institutional investment management business survey carried out in France by consultant Greenwich Associates.
The results of 62 interviews with France’s largest pension funds (caisse de retraites), corporate pension funds, treasury funds, insurance companies, foundations and endowments, show assets predicted to rise to e288bn by end-2001 from their 1998 level of e246bn – a rise of 17%.
Insurance companies are set to record the largest volume rise, jumping 22% to e194bn by 2001 against 1998 assets of e159bn. Public/industry funds are expected to jump from e35bn to e40bn – up 14%, with pension funds to follow suit gaining 13% from e48bn to e54bn. The growth will mostly be concentrated in the largest funds, however, with those comprising more than e2.5bn rising 18% from e218bn to e258bn. Funds in the range e501–2.5bn will also increase 14% from e22bn to e25bn, the report says.
In terms of their total euro-weighted asset mix, the survey records a decline in French institutional appetite for domestic bond and equity portions compared with foreign securities. The 59% average in domestic paper held today is set to fall to just over half the portfolio by 2001, with the reverse occurring in non-domestic European bonds, up from 7% to 10%. International bond allocations will also gain in importance, doubling in portfolios, albeit from 2% to 4%.
Similarly, while domestic equity exposure slides from 12% to 10%, European portions are set to rise from 4% to 6% with North American shares up from 1% to 3% and other international shares increasing slightly to 2%.
Both cash and property assets register a dip on the same time scale, giving an overall institutional portfolio average for 2001 of bonds (21%), equities (21%), cash (6%) and real estate (5%).
While internal investment management is still the mainstay of French institutions the survey does register a slight move to outsourcing among those with smaller asset holdings. Overall, 67% of pension funds invest their own assets today – a figure set to fall to 59% next year. Similarly, 92% of insurance companies have internal management teams at present, set to drop to 89% by 2001.
While institutions with large amount of assets are unlikely to change set-up, mid size institutions holding between e550m and e2.5bn will continue an outsourcing trend, with the number handling their own transactions falling from 45% to 35%.
In terms of the investment vehicle of preference for French institutions, dedicated FCPs and SICAVs will reap the reward of this externalisation.
Almost a quarter of ‘pension funds’ say they will invest in an FCP ‘dedié’ compared to 17% in 1988, with discretionary mandates also picking up marginally increased interest.
The breakdown shows corporate dedicated fund use up sharply (from 4% to 17%) with public/industry fund figures rising from (22% to 26%), although only the latter say they will also deploy more segregated mandates.
The net result is that externally managed assets up for grabs will increase markedly by 2001 with the survey showing expectations of a 27% hike between 1998 and 2001 with future assets expected to reach e66bn from e52bn two years ago.
At present levels, specialist investment managers should be the best placed to capture this asset influx with over half of all pension funds (four-fifths of corporate plans) saying they employ specialist managers, against approximately a third hiring balanced managers.
These statistics are reflected in the average number of managers used by French institutions – currently sitting at 4.4 – with just over a quarter of institutions employing five or more houses to manage their assets.
Passive management does not appear to tempt the Gallic investment palate, however. A meagre 1% of institutions currently invest the index, a figure expected to remain rooted at the same level three years from now.
However, investment managers should be both wary and wise – depending on their present status – to the fact that 42% of French institutions expect to hire new managers in the future. And perhaps even more so given the statistic that 83% have already changed manager at some point in the past. Contract terminations though are more prevalent amongst specialist managers (16%) than their balanced counterparts (3%).
For consultants, the news is not especially encouraging. Only a handful of respondents say they will be seeking advice in the future, on top of the 13% using consultants today.
While over half the responding institutions did say they have carried out a risk assessment study in the last year, 86% of these were carried out by internal staff.
The DC phenomenon also looks set to continue shaping the future of the French pension fund arena. According to the Greenwich survey, 41% of the responding institutions operated DB plans last year with the figure set to fall back to 34% on projections for 2009.
Conversely, over 10 years the 1999 figure of 59% of responding institutions with DC arrangements will climb to 66%. Hugh Wheelan

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