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Impact Investing

IPE special report May 2018

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Storming the French market

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The big thing to hit the French institutional asset management market over the past year is multi-management.
Michel Piermay, chief executive of Paris-based consultancy firm Fixage, says that the major financial institutions involved in asset management have recently created multi-management subsidiaries. “All big banks and insurance companies want to be a multi-manager,” he says.
Isabelle Motte, associate commercial general director at HSBC Asset Management (Europe) in Paris, formerly known as CCF Capital Management, which has e26bn in assets under management, agrees that the multi-management explosion is new to the market, as are the managers getting involved. “This is an area of development that is common to all players. If companies don’t already have dedicated teams working in this respect, then they are in the process of setting them up or investigating the
opportunities that it might provide.”
She identifies a market place where more and more managers are becoming each others’ clients as well as their competitors. This is particularly true of companies that specialise in manager selection, where institutional players are beginning to recognise the expertise of their counterparts in other companies in a market marked by consolidations and an increasingly global influence. “An institutional client might ask his manager to take care of his international portfolio, who in turn might ask managers in other companies for advice on assets and areas of investment that they might not yet be involved in. I think this is an amusing feature of the industry at the moment because our competitors are increasingly our clients and vice versa,” says Motte. She predicts that, within two years, every major asset manager in France will have teams dedicated to manager selection alongside traditional asset management.
“The traditional role of the asset manager is to pick the right stock,” says Motte. Since France has an extremely well developed mutual and collective management market with more funds than stocks on the Paris Bourse, manager selection is a booming industry here. “People are now beginning to exploit the potential in this market and soon we will see more manager selection companies than actual management companies.”
“This will lead to the emergence of a two tier industry,” she believes. There will eventually be a return to traditional management because of the advantages it has when it comes to markets and stocks whilst fund selection companies will be better equipped to advise on investment processes and strategies, since good quality service is now important to institutional clients.
Frédéric Cruzel, director of institutional asset management for France at Société Générale Asset Management (SGAM ) in Paris, which was established three years ago and has seen its world-wide assets under management grow by 175% to e170bn, believes that multi-management is a well regarded source of diversification, particularly in today’s volatile markets where stocks and management styles are constantly evolving. SGAM has been in partnership since 1998 with Frank Russell to meet this challenge. “These factors combined in multi-management allow us to obtain more interesting risk performance levels.”
Antoine Dehen, who is director of commercial development at ABF Capital Management in Paris, believes that the growing interest shown by the traditional institutional client base in multi-management is leading to an increasing use of quantitative products and reporting methods. ABF, with e2,482m in assets under management, is a specialist quantitative company which was founded twelve years ago. Managers are turning to these products mainly because of the importance of risk control. “This is the first benefit of the quantitative process,” says Dehen adding that their customer base is now diversified between multi-managers who are active in different markets and it is an area where most large institutional managers are now making a play.
Director of communications at ABF Capital Management, Marina Ezdiari says that multi-management is a relatively recent development and reflects the growing need to access performance related products. “This change began principally two years ago, but all the major investment houses are now involved, albeit with different strategies.” The quantitative process involves using broader databases to build portfolios rather than relying on more traditional qualitative research methods.
Cruzel points out that clients are also turning to quantitative management as a monitoring device. “SGAM is able to offer diversified quantitative management even to managers who look after their own assets.” He says that, in line with this, institutional clients are now looking for quality and transparency of reporting. This is particularly important for risk measurement and performance attribution. The opening of the market and moves towards a more global marketplace have led SGAM to work closely with Fitch AMR, the Paris based ratings company, to help them in respect to long term investment strategies. “The need to establish well-defined management and risk control structures comes from steps we’ve taken to match the high standards of our Anglo-Saxon counterparts on all levels of service,” says Cruzel. He notes that the ratings agency considers such criteria as manager independence, the quality of the manager/ client relationship and the quality of the investment structure and process.
Jacques le Galloudec, head of French institutional and corporate sales at BNP Paribas Asset Management in Paris, agrees that performance reporting and attribution are now popular concepts, but that institutional clients are looking first and foremost for accuracy. Assets under management for the merged group now total e166bn, spread over a diverse product range and client base.
“Clients are wanting to know how performance levels are achieved and how added value is created,” he says. But he believes that managers are using consultants much more for this. “There are perhaps two or three big consultancy firms in France and all major customers are turning to them for advice on performance attribution and ratings.”
New teams have been created within BNP Paribas to take on the challenge of multi-management and more than e1bn has been transferred to it from traditional asset classes like bonds and equities.
ABF’s Dehen also believes that performance attribution is now at the top of clients’ needs and that this is an area in which France is moving progressively forward. “In a diversified portfolio, clients are no longer satisfied with statistical evidence. They want to know how and why certain levels are achieved and if management style is a contributing factor.” He says that substantial efforts have been made to improve reporting techniques to satisfy the growing need for transparency. In this respect, he states that ABF has all the raw materials to be able to collate information that is both wide ranging and trackable.
Piermay at Fixage notes the changing nature of the relationship between fund managers and clients as an important development in the French market. The hitherto accepted standard service is no longer sufficient. “Clients want a more personalised service. They want to speak to their asset managers, they want to know who is responsible for what, whether it be asset allocation or risk control. In this respect there has been a mini-revolution in what clients want and what managers do.”
Le Galloudec believes that clients are now also interested in technical developments. “The third link is now the technical link.” Aside from multi-management, he adds that BNP Paribas now needs to develop alternative, quantitative, index and structured products.
Cruzel at SGAM says that technical developments, particularly the ever expanding influence of the internet, is opening up new opportunities for asset managers.
“The internet allows the rapid diffusion of information and communication and this is definitely an area of substantial growth.”
There is a general feeling that the French market is opening enormously, both inwards and outwards. Le Galloudec believes more and more competition is coming from outside France and suggests that this is because management styles are perceived to be better. “We see a lot of changes in style as people adapt to the new open market.” With the euro now firmly implemented, the market is now euro-centred rather than just French centred. “Everything now is done in euros; bonds, equities, the majority of our business is now concentrated in Europe.”
SGAM’s Cruzel believes that foreign managers are just as well placed to obtain mandates as their France-based counterparts. Fee structures that once acted as barriers to the
market are beginning to change as managers realise that to maintain a high level of expertise and reporting and to develop real research and analyst teams, outside knowledge is needed. “Institutional managers in France must accept that they have to pay a certain price for good quality foreign managers but there is now progress in this area. Clients are undoubtedly beginning to look beyond France,” he says.
Isabelle Motte at HSBC observes an increasing international presence in the Caisses de Retraite market. There has been a considerable opening here in the last few years where foreign players were traditionally marginalised by a preference for national French managers to take care of what is a “French phenomenon”. “Large international asset management companies, particularly European, have an increasing presence in the market place, but more importantly, they are now more accepted,” she says. She claims that the French remain French and Europe centred. “There are no real global French players. But this will change.”
CDC IXIS Asset Management, formally CDC Asset Management, and one of Europe’s 10 largest investment managers with e329bn in assets under management worldwide, is trying to break out of the French financial group mould. CDC says the new moniker heralds a strategy of growth.
Markets it has already singled out to attack in Europe are Italy, Spain and Germany and the group’s expansion in the US means it now manages $130bn stateside with $85.7bn of this in segregated business.
“There are very few French groups, no more than three or four, able to play a major part in the field of wholesale investment banking in Europe and CDC IXIS is one of them,” comments Daniel Lebègue, director general of CDC and president of the board of CDC IXIS.
Dehen at ABF believes that the French market is still very domestic oriented, though domestic signifies Euroland more and more, because of openings brought about by the introduction of the euro. “Euroland is now the full French asset management market.” He warns that those that don’t accept the wider market could lose business. The key point to the changing nature of France’s domestic market is that there are no longer currency exchange problems to worry about in Euroland. This view is supported by Piermay, who also identifies Euro-zone as the main market now for French players. “International diversification isn’t common because of currency exchanges and other fiscal barriers, such as taxes.” He says that the main movement at the moment is from the French market to the euro market.
Daniel Pirrotta, director of institutional clients at Axa Investment Managers in Paris, who have over e105bn is assets under management in France, believes that past trends where French clients showed an interest in individual country stocks as opposed to global equity portfolios have passed. Europe is now their main target area. “Institutional clients are now mainly interested in Euro-zone equities, pan-European equities and European small caps.” Even in the case of currency funds, investors are moving out of dollar positions and into euro positions to avoid the risk and volatility associated with currency funds.
The recent consolidations in the French asset management market are beginning to have an effect and more are expected. Motte at HSBC believes that size has now become an important issue and that mergers are beneficial to the overall market. “The size of invested assets is huge and permanent. We’re never done investing.” A larger company allows investments to grow and makes larger investments more manageable. CCF’s recent link-up with HSBC gives them a wider international scope, even though Europe remains their core market. Their clients are also now looking
further afield. This globalisaton is a new phenomenon. “We are being asked more and more to get involved in international trading. This simply didn’t happen before.”
Consequently, the shape of the French market is being radically altered. There is no room for middle size companies and big players are set to dominate with smaller companies surviving as niche and specialist players only. “They will be big or small,” ssays Motte.
Cruzel at SGAM agrees with this view: “The recent consolidations are creating a market of big players and small specialist firms. It will be very difficult for middle size companies.”
He believes that new large institutions are looking to become global players who will dominate the French market, either by themselves or by forging other partnerships. “There will definitely be others,” he says.
Le Galloudec believes that the main benefit of the merger between BNP and Paribas is the exchange of knowledge and ideas, and not simply the sheer capacity that the merger created. “For instance, Paribas brought us the capacity for diversified balanced funds. We were not really able to offer services in these areas before.” The link, nevertheless, means that they can now offer virtually any product or investment solution, but growth in client base is more important than product creation. “This is where our development is focused,” he says.
Piermay says that the problem is not one of size but reaction. “What matters is the ability to adapt continuously to the changing needs of clients. And clients are very demanding.”
He believes that the balance is quite clearly in favour of the clients.
Dehen at ABF points to the possible job losses associated with mergers and takeovers, because the French asset management market is not big enough to absorb each player. He believes that too much consideration is given to these developments as a French phenomenon, since it is happening elsewhere too, particularly in Spain, Italy and Belgium.
Alternative investments are becoming more popular following a period of uninspired performance. Cruzel at SGAM believes that investors are beginning to wonder if they can find added value in other sources and if alternative management doesn’t present more interesting risk return potential. “The year 2000 was mediocre and SGAM has invested in research studies and teams to look at alternative investments.”
Motte at HSBC says however that while specialist managers are getting involved in alternatives, advertising alternative products is not allowed in France. “Buyers of these products are not final end clients, because they are not informed of them, but managers who invest on their behalf.” However, institutional clients are increasingly interested in these products and she believes that this is a growth area, since the performance potential of these products is very significant. “The objective is towards absolute performance, whereas traditional management is based on relative performance.”
At BNP Paribas, le Galloudec says that alternative investment products are under development, reflecting their growing popularity.
Dehen at ABF says that their clients are showing very little interest in alternatives, preferring instead to remain careful and prudent in their investment strategies. “Our portfolios are physically invested and are large and well-diversified. We prefer to go for liquid, trackable stocks, not derivatives.”

One area of new product development that Dehen does identify is the growth of sustainable funds. “This is an interesting market and up to 25 new funds have been launched in the past two years.” One factor for this growth comes from French trade union involvement in the investment of Caisses de Retraite. “The unions would like to see that investments don’t contravene general union principles,” he says. The sustainable funds employ the triple P principle – people, planet, profit. Generally, the investment process takes into account all stakeholder needs, not just the shareholders’, but also the employees’ and the customers’. They are established with respect to the environment. “In short they are not just concerned with profits.” These differ from ethical funds in that they seek to show how company organisation brings long- term added value to the investor.
Specialist analyst groups are now being formed to help with the development of these funds. “For these funds, we need a very structured investment process,” says Dehen.
ABF are working closely with Sustainable Investment Research International (SIRI), a group comprising local and national analyst firms from several countries who are dedicated to these new products.
Retirement and pensions have been the subject of intense political and social debate recently in France.
Dehen believes that France is caught in an impasse. “Some believe there will be a compromise, where the existing system will accept a certain amount of capitalisation.” The capitalisation of funding of the French system will not come softly and only with political provocation.
The current political debate about the Caisses De Retraite pay as you go system has come full circle. “We are back at the starting point,” says Dehen.
Contribution terms need to be extended as do retirement dates. Even though the Caisses de Retraite system involves huge amounts of money, demographic changes imply that reform will be inevitable. “It is something we will have to face, especially future generations.”
Dominique Piermay of Fixage does not foresee any new pension reform or laws. Indeed, the ‘Loi Fabius’, designed to lengthen savings plans maturity, will not signal a revolution but an evolution. “It will not be a
drastic move. We envisage a few tax reforms but that’s it.” However, it will stimulate competition between local and global fund managers.
Pirrotta at Axa underlines the growth potential for French asset managers that the Epargne Salariale reforms will bring about. These reforms will oblige employers to offer their employees extended voluntary savings periods. Currently, only one in three salaried workers participate in these schemes and in companies of less than 50 employees where participation isn’t compulsory, only 90,000 out of 4.8 million do. “The Epargne Salariale will mean that companies will be obliged to provide savings for their employees. As a consequence, we expect a great deal of cashflow to be invested in medium and long term funds. This opens the market for asset managers,” Pirrotta says.
Motte at HSBC also sees the opportunities that the Epargne Salariale will bring to the industry. “We will need to create the tools and the means to help with their development.” But she is more enthusiastic about the changing nature of the French mentality in this area. “What is more important is the growing consciousness on the part of the French about how they will finance their retirement. They are saving. But it remains a political problem.”

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