October 2010

FRANCE: small but perfectly formed

small_petitfoursFrench boutique asset managers are flourishing and are no longer as small as they once were. But their challenge now is to force banks to sell their products.
Angele Spiteri Paris reports:

The boutique asset management sector in France could be said to outshine that of any other European country – both in terms of creation and in terms of success. But the lack of open architecture is still a challenge for these smaller players.

Despite being home to some of the largest asset management firms in Europe in terms of assets under management (AuM), France is spawning a staggering number of entrepreneurial investment managers.

Eric Helderlé, the sole managing director of boutique Carmignac Gestion, says: “There are many asset management firms being created in France. We’ve had at least 50 since the beginning of the year. Most often, they’re founded by people who were working in large institutions and who believe they can offer their clients products more suited for their needs.”

Dominique Carrel-Billiard, CEO of Axa Investment Managers, a large player in the markets, says: “The number of start-ups and entrepreneurial enterprises in investment management are unparalleled in the rest of Europe.”

Jean-Philippe Taslé d’Heliand, deputy executive officer at boutique Oddo Asset Management, says: “There are hundreds of asset managers in France, with many managing a few hundred million euros.”

But Pierre Servant, CEO of Natixis Global Asset Management, another industry giant, makes a distinction between some of the players in the small space. He says: “You have real boutiques [the single strategy/single product shops] and the middle players who run a focused but more diversified, high-fee business where performance is key. Carmignac in France is a good example of this second category.”

Oddo’s d’Heliand says: “We and another ten asset manages are a ‘club’ of big boutiques, managing between €10bn-20bn. The gap between the global players and us is huge but we have very large growth potential. We have room to develop as specialists and don’t consider the global players as direct competitors.”

And it’s these ‘big boutiques’ that have been seriously making their mark on the French asset management industry. They are no longer just picking up scraps of the large fund houses, but rather becoming a force to be reckoned with in their own right.

In terms of growth, one member of this club has been hitting the headlines over the past couple of years. Carmignac Gestion stands out as one of the larger boutique players, with around €50bn in AuM, having garnered success through what has been one of the most difficult periods in financial markets of modern times. The firm saw inflows in the last quarter of 2008, as Eduoard Carmignac himself said in the May 2009 issue of Funds Europe.

Helderlé, of Carmignac Gestion, says: “We were one of the survivors of this crisis and we like the idea of setting an example for other independent asset managers. If you don’t have independent asset managers, you will never truly have open architecture, so we need to encourage other firms in this segment of the market.”

Some in the industry may have been whispering behind their hands following the seemingly instant success of the firm. But many have positive things to say about it.

One industry expert says: “Carmignac is offering something very specialised and distinctive. Performance is crucial and so the business is like a bicycle; you have to keep pedalling if you want to move forward.”

Jean-Louis Laurens, managing partner at Rothschild & Cie Gestion, says: “I respect Carmignac Gestion. The firm aimed at doing well throughout Europe and has largely succeeded.”

Rothschild & Cie Gestion is another member of the French ‘club’ of big boutiques. The firm, which is the asset management arm of the Rothschild private bank, has €20.5bn in AuM and could be one of the contenders to bump Carmignac off its podium.

But Helderlé is not intimated by Rothschild & Cie, Oddo, or any of the other big boutiques. On the contrary, he actually welcomes the competition, saying: “We want our competitors to be big and strong because being one of the few garnering such success was positive for a while but now it could be self-destructive. We need constructive competition.”

William De Vijlder, who is now a member of the executive committee of BNP Paribas Investment Partners and a chief investment officer, says: “Boutiques looking to grow will have a lot of demands made of them. One of their most important challenges will be to retain the talent that got them the success in the first place.

In an environment rife with M&A activity and one that encourages the multi-boutique structure on behalf of the fund behemoths, it stands to reason that smaller players may feel pressure to sell out to their larger competitors.

Experts within large fund houses believe this pressure is quite acute.

De Vijlder, of BNP, says: “It makes sense for the smaller, investment-focused shops to tie up with a bigger player because it takes a burden off their shoulders and allows for a big jump in terms of assets.

“These boutiques create opportunities for bigger players because they can look at acquiring capabilities they don’t have. It’s a given that larger companies will always look at whether they have gaps in their business and consider boutiques to fill that hole.”

Axa’s Carrel-Billiard says: “Boutiques need distribution power. The likely scenario is that boutiques will get absorbed by large players to leverage off their distribution power and have that reassurance behind them.”

Servant, of Natixis, agrees: “Some boutiques have had a difficult time because of the crisis and many are looking for a ‘big brother’.”

A good example of this in action is H2O Asset Management. The specialist firm was the brainchild of Bruno Crastes, former CEO & CIO of Amundi’s London business. He broke away from Amundi only to hand over a major stake of his new firm to French player Natixis in July this year.  Crastes’s company will leverage off the sales teams of Natixis Asset Management in France, and of Natixis Global Associates abroad. It will also rely upon the expertise of Natixis Asset Management corporate services for its middle office, IT, reporting, risk control, etc.

Jean-Francois Boulier, chief executive of Aviva Investors Europe, says: “As long as the French stock market remains volatile, small equity boutiques will continue to struggle as they are predominantly equity specialists. But this may also make them more creative, which may lead them to adapt other business models and solutions like partnership for distribution.”

But many of the smaller players don’t feel the need to partner with the large asset management machine.

Laurens, of Rothschild & Cie, says: “We feel no pressure to tie up with a large fund house. We’re strictly positioned as a boutique investment manager and concentrate on our areas of expertise.

“Of course, we wouldn’t mind doubling our size but we value our independence and want to keep it. We don’t want to be diluted and become minority shareholders in our business. As a boutique you cannot be too big because then you have to go industrial and you tend to lose something along the way.”

Guillaume Poli, chairman of the executive committee at Edmond de Rothschild Investment Managers, says: “We don’t feel the need to be absorbed into a big multi-boutique structure. We are lucky having one shareholder, with a long-term view, and having none of the constraints of a publicly listed company. We’re not aiming to make a quick buck on the back of selling the firm.” Edmond de Rothschild Investment Managers has €8.7bn in AuM.

Fabrice Seiman, co-president of Lutetia Capital, another French boutique, says: “Compared with the heavyweights, we have the advantage of being very close to our clients, and can thus provide them with better-targeted solutions. In the long run, we foresee a two-pole structuring of the asset management industry around a strategy of scale on the one side and a specialisation strategy on the other.” Lutetia has around €38m in AuM.

Open architecture
The French funds industry is notoriously closed and open architecture looks like a distant dream for some of the independent money managers.

Some believe that these smaller players are crucial to ushering in open architecture in France.

Helderlé, of Carmignac, says: “I believe the independent asset managers will succeed in breaking open the industry. It’s a long-term fight but I don’t see why the French market should remain closed.”

And this is bound to be a tough fight indeed.

Carrel-Billiard, of Axa, says: “We can currently see ‘DIY’ open architecture in the retail market. People open accounts with different banks to have access to the funds offered by those different banks. And this is how the retail client is diversifying his or her portfolio.”

Another issue the big boutiques that hope for open architecture need to contend with is the blinkered demand for money-market funds in their French client-base.

Carrel-Billiard, says: “The level of interest rates earned on money-market products don’t give rise to the type of differentiated returns that lead to open architecture, so their popularity in France makes a difference to the overall market structure.”

The players themselves are very aware of this and of what the French retail market wants. Unfortunately, it’s not very supportive of their cause.

Helderlé, of Carmignac Gestion, says: “In France, investors are not very happy investing in funds. They’re more interested in insurance contracts and money-market products. And this cannibalises the potential of investment funds.”

In fact, Poli, of Edmond de Rothschild, says: “As for low-volatility, secured products, it’s not the big banks we consider competition but rather the appetite for ‘Euro-type’ life insurance contracts. Their popularity is one of the idiosyncracies of the French market.

“But returns from these contracts have been eroding for some time, and we hope that a persistent low interest rate environment will mean the attraction of such products wanes and the market will be more open to investment funds.”

Interestingly, the deal that created Amundi, now one of the biggest asset managers in Europe, could provide independent French boutique asset managers with an inroad to the French retail market. Amundi resulted from the merger between Crédit Agricole Asset Management and Société Générale Asset Management (SGAM).

Helderlé says: “The key to triggering open architecture could be embedded in the Amundi deal. They may have an agreement to sell SGAM products within the Société Générale network for a while and after a while people could forget that Amundi is [or used to be] SGAM and the architecture will open. You only need one major bank to start offering other asset managers’ funds, and then the rest will follow.”

Laurens, of Rothschild & Cie, says: “Société Générale selling off its manufacturing capability was a major step towards open architecture. Société Générale will be a leader in opening the fund architecture for mainstream clients.”

But words from Amundi’s head honcho may just burst this bubble of hope. Yves Perrier says: “We have a ten-year agreement between SGAM and the Société Générale retail network. When that runs out, the relationship will continue. As long as the Société Générale network is satisfied with the products we provide, then the contract will just be renewed.”

Lingering potential
Carrel-Billiard at Axa, says: “The sale of Amundi products through the SG network is interesting because they’re setting up distribution interfaces for each network so that products look like they belong to Société Générale, even though the factory that manufactures the product is the same one as that creating Crédit Agricole funds. The jury is still out [about whether the deal will bring open architecture to France], but if Amundi does its job well, the deal won’t necessarily mark the complete opening of the French industry.”

Servant, of Natixis, is equally doubtful. He says: “The creation of Amundi doesn’t change fundamentally the distribution scheme in France. Ucits IV could play a bigger role in the promotion of open architecture.”

Boulier, of Aviva Investors, says: “Open architecture could develop in the French market but the crisis has shown it needed a professional framework in order to bring value to customers. A ‘guided’ open architecture means more emphasis on the relationships between a limited number of providers and the distributor.”

Poli, of Edmond de Rothschild, understands where the big players are coming from. He says: “In the very near future I don’t see open architecture coming from the big banks. They’re under pressure to make money and get their balance sheets in place and distribution [of their own products] brings in the money, so they’ll continue to do it. But this may change.”

But Laurens says there still is hope. “Some banks are looking to partner with smaller asset managers to launch open architecture products for the mass market so the potential there is huge,” he says.

©2010 funds europe

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