French fund management is looking at ways to further internationalise its already large industry, including making the customer experience better.
Pascal Blanqué (global CIO, Amundi)
Joseph Pinto (COO, Axa IM)
Pascal Biville (deputy CEO, BNP Paribas Investment Partners)
Dominique Carrel-Billiard (CEO, La Financière de l’Echiquier)
Pierre Servant (CEO, Natixis Global Asset Management)
Funds Europe: Frog, a French industry working party, launched this year to look at how the French funds industry could be internationalised. What steps need to be taken to achieve this and why has the industry only just started?
Dominique Carrel-Billiard, La Financière de l’Echiquier: The industry needs to focus on making its proposition for international customers attractive and making itself more accessible. There are three structural themes underpinning this, each reflected in the Frog initiative’s working groups: fund management activity; technology and innovation; and communication.
But, frankly, with four French companies within the top six European firms of leading global fund managers, I feel French fund management is already international. Making the industry more international has been an ambition for the French fund management industry for ages. Having a strong asset management industry is an important factor in the development of the French economy, to channel money towards investment in the French economy and, more importantly, the European economy.
Joseph Pinto, Axa IM: A key aim of this initiative is improving the customer experience with French asset managers. When we shared our experiences, it was realised that foreign customers felt the customer experience to be better with Irish and Luxembourg funds.
For example, we found that regulations put in place in France were not as well communicated as in Luxembourg and elsewhere, which left people with the impression that those marketplaces were more customer-friendly than France, which is not true. So the initiative is about breaking silos among key stakeholders to improve the customer experience.
All the key stakeholders are involved: asset managers and asset servicers; the AGF trade body; the AMF regulatory agency; and the French Treasury.
Pierre Servant, Natixis GAM: Another problem we identified is to do with the tax landscape, which changes every year. This is a big problem for a lot of foreign investors who are clients of French firms.
Pascal Biville, BNP Paribas IP: There are two issues for me: the ability of French funds to be sold abroad; and the perception of the French asset management industry itself.
Our experience at BNP Paribas IP of selling French funds to an external market, mainly Italy, has been very encouraging, but of course as an industry we could do more to internationalise.
Funds Europe: Banks have placed investors in bank products in recent years and this may have been a cause for French fund houses to internationalise. Now that funds are surging again, might this detract from these global ambitions?
Pascal Blanqué, Amundi: There are more powerful forces at work behind the trend of internationalisation than this.
Within the global distribution space, and also the institutional space, clients are concentrating their business more and more on a limited number of providers and forming partnerships with them rather than conventional business relationships. This is leading fund selection to becoming centralised and the number of funds is being rationed. I call all this a ‘vertical’ pressure. At the same time, these partnerships mean the value chain is being enlarged horizontally. Clients want more than just products from us now; they want more value and this comes in the form of services and advisory, such as asset allocation and reporting.
A further horizontal force is the globalisation of product offerings. Clients are less interested in domestic or regional products, and this has consequences from a manufacturing standpoint for us, the producers of funds.
So these combined forces are drivers that necessitate change, including internationalisation.
Servant: Asset management is an industry very much limited to the G5-G6 nations, such as the US, the UK and a few continental European countries.
Management firms that want to globalise do so usually because their clients are globalising their investment portfolios.
As was mentioned, this means many more products have a global focus now. In the US, for example, it’s difficult to sell US equity and easier to sell international equity.
But this diversification is not only good for clients; it also leads to business diversification, which is good for fund management firms because if business slows in one area, there are other areas to concentrate on.
Carrel-Billiard: I do not believe this is correct to say our international focus is simply down to a shrinking home market that banks created by redirecting client money to their own balance-sheet products.
Originally, asset management in France evolved from a local money market industry in the 1990s that then grew mostly because it was illegal to pay interest on current accounts.
This gave initial critical mass which was later further reinforced by growth in the life insurance industry. The absence of pension funds meant life insurance products were the only long-term savings option for people, which further helped asset management to grow.
Ultimately, given this strong domestic market, it is simply a legitimate aspiration for businesses to want to rise to global leadership and France has been building leadership in asset management since the 1990s. Frog is much more about making it easier for customers to do business with us and aligning all parties to promote this.
Pinto: With the industry under stronger fee and regulatory pressures, firms need to be extremely cost-effective and attain scale to generate the returns required. International expansion is a way to make this happen.
Funds Europe: Is distribution evolving along open or guided architecture lines?
Servant: The UK distribution landscape has major differences to France, because universal banks in the UK are not in the fund business any more and funds are mainly bought from platforms, private banks and IFAs [independent financial advisers], similar to the US.
French distribution is still very bank/insurance-led and architecture is guided rather than fully open.
However, although there is no strong drive for open architecture from retail clients, professional investors and private banks do want a greater diversity of choice and more sophisticated offerings, which pushes towards a more open architecture.
Carrel-Billiard: In France, IFAs account for probably just 6% to 8% of fund flows. Generally, the more mass market you go, the more you go towards closed architecture; the more high-end you go, the more open you go.
But now, as a result of MiFID II, some of the private banks are going to want purely allocation advice based on ETFs, and that’s going to change the industry.
Pinto: A key challenge for pan-European players with MiFID II is to ensure that local regulators are aligned so that different fund management entities within our groups across Europe can also remain aligned when working with distributors. This is important for promoting common values across an organisation, as we do.
Carrel-Billiard: For me, the more pressing concern than MiFID II is Priips [packaged retail investment and insurance products], which should become effective on January 1 next year. It will entail the production of Kids [key information documents] that are not the Kiids [key investor investor documents] we already produce under Ucits regulations.
If a life insurance contract has 300 underlying units, can you picture a catalogue with 300 pages, each page a specific Kid for a specific unit? What that will lead to is probably even more closed architecture as the combination of investment-specific regulations, like MiFID and Priips, force economic constraints on distributors. Many banks have closed their architecture because full open architecture is too costly and this means that regulation not only may lead to compressed margins but also to reduced investor choices.
Servant: In fact, we do have a life insurance product that has 300 underlying funds and each must have its own prospectus. Yes, this adds up to thousands of pages – yet we find that people only invest in a limited number of the funds on offer.
Blanqué: There is also a lot of reporting needed in the background from asset managers to clients – for example, Solvency II reporting for insurance clients, or transparency reporting for distributors. This is an example of where the value chain has enlarged. Asset management is not just about product any more when we also now have to deliver on reporting requirements. There is a cost to all this, yet the level of support that clients need does at least serve to strengthen relationships and even turn them into partnership links.
Servant: Advice and solutions, which is now what we are called on to offer clients as their asset managers, are not easy to give when it comes to the mass market, though digital may offer some solutions.
Pinto: Yes, because if we do not simplify products, then new entrants like robo-advisers, supported by ETFs, will gain. So it’s critical for us to simplify the way we package and sell our products to customers.
Servant: Fighting the complexity of our industry is a hard task. Frankly, the complexity is absolutely huge.
Blanqué: The bulk of the industry’s economics in the past was centred on product, but it is now the case that the economics centre on services, such as advisory services and solutions. This is a critical move and means providers have to deliver across this value chain.
The narrowing of the number of external funds that distributors will invest in is a global phenomenon generated by the hunt for alpha in a challenging context of low interest rates, cost considerations and more focus on marketing services. This has in particular boosted the ETF industry and led to more demand for multi-asset solutions. Distributors are looking for differentiated products.
Servant: In the US some distributors that were providing traditional asset allocation have moved to offer robo-advice, or at least to industrialise their delivery of asset allocation using more ETFs. This is very challenging for active managers.
Blanqué: It marks a trend towards simplification of the product offering. There are now packaged solutions made up of ETFs targeting underlying betas and investment factors. It is to an extent cost-driven, but it is also a simplification development.
Servant: Yet no matter how popular the simplified robo-advice model is now, whenever there is a good active fund, there will usually be a capacity issue with it!
Carrel-Billiard: Of course! To draw an analogy, it’s like Nutella: it’s one product that every big grocery store in the world wants on its shelves. But the producer of Nutella is not a broad-based company; it is a specialist.
It’s the same with asset management: the moment you have a differentiated and strong offering, you will be on distributors’ shelves. It’s why we have so many boutiques in France.
Pinto: Exactly. It is only a small portion of the so-called active management industry that delivers very good products.
Servant: I agree. A lot of people who are supposed to be delivering alpha are not doing. That’s the problem and a specific problem for continental Europe.
Funds Europe: Is the French industry as tainted by ‘benchmark hugging’ as the broader funds industry is? Are firms tempted to offer passive products?
Servant: There is interest in offering passive, yes. Some firms, like Amundi for example, have ETF ranges. Starting from scratch, we moved to become a top-four manager at the European level in just five years.
Beyond this, though, there is a wider trend towards packaged solutions that include ETFs. I’m sure we will see more and more so-called smart beta solutions in the distribution space, particularly low-volatility products. This type of product was designed for institutions but it makes a great deal of sense for retail clients as a risk management approach to investment.
Biville: There is a lot of potential in the smart beta world and that’s the way we are approaching passive management.
Pinto: Yes, for us as well, but also absolute return products are growing. Both absolute return and smart beta are appropriate for certain segments.
There is also the emergence of Ucits liquid alternative products for retail customers. We recently launched a liquid alternatives expertise out of Hong Kong and already manage some global products in that field.
Once you have connected with private banks to distribute to the high-net-worth market, and then established your firm as an authority in the liquid alternatives sector, this product will work with other customer segments.
Carrel-Billiard: France is a country where financial mathematics is advanced, and the industry reaps the benefits of that. The industry is centred more towards innovation, and the controversy around hugging benchmarks doesn’t make the same level of noise here as in other countries.
There are about 650 asset management companies in France – that’s a lot – and probably more than 600 of them are boutiques. If all the boutiques are like us, then their active share is above 90%. To exist, you have to say something different and with that many small shops, I’m sure that there is not so much benchmark-hugging as elsewhere.
Blanqué: The general trend – as well as from demand for local products falling in favour of global – is for cap-weighted benchmarks to be replaced by various forms of smart betas including factor investing. Those smart betas started in the institutional space, and now the industry is trying to adapt them to the retail side. Smart beta and factor investing are two faces of the same evolution.
Pinto: A number of French companies have been quite good in these areas and have even been able to export their competencies outside France – and not only the large players. France has been able to create very attractive boutiques that have grown and exported their products – more so than the UK market.
Funds Europe: Given the pre-eminence of large-fund firms in France, is there a future for such a high number of boutiques?
Carrel-Billiard: The existence of boutiques is justified if they bring something different to the table, either in the quality of their service, in their performance, their innovation, or their price.
Having more than 600 boutiques in France means there is room for consolidation and the question becomes: what could the trigger for this consolidation be?
Indeed, there has been talk about consolidation for a long time and not a whole lot has happened so far.
My gut feeling, though, is that the combination of quantitative easing (QE) and negative interest rates, plus regulations like MiFID, and also the fact that there’s a maniacal hunger for growth in markets, will lead to some consolidation in the short term.
Blanqué: QE has bought the industry some time. Just following the crisis, there were many people ready to jump into various formats of consolidation – but they didn’t. Thanks to QE, they enjoyed good average returns in the last three years. Those returns cannot be extrapolated. The fact that we have moved into an era of diminished returns means that cost efficiency will prove key. The pressure on the economic models will mount.
In addition, despite this, we now have the fact of traditional business relationships turning into long-term partnerships. This implies there has to be a more limited number of players in the industry going forward. All in all, these are forces that can drive consolidation.
Servant: Large global companies are not invincible. They can make mistakes. In the US, the winners of 20 years ago do not exist any more.
And just as medium-sized players who still provide a core expertise will have difficulties and could well be replaced by passive, small firms with nothing distinctive will also not survive.
Yet I would say of all these types of asset managers, it will be the medium-size players that are probably going to consolidate the most. It is not easy for them to sell themselves outright to the large banks, because the banks do not see value in the asset management itself, only in the distribution part.
It is a very complicated set-up and will take time.
Pinto: The number of boutiques is high, but there are always large players – like a number of us around the table – who are ready to buy them and I personally believe this will ensure buoyancy in the boutique industry.
Their strength lies in their creativity, innovation and product performance. The industry offers more and more potential acquisitions.
And there are also some mid-sized players that are owned by banks that, because the banks are under pressure from Basel III, may want to sell their asset managers and strike a distribution agreement with them, rather than own them.
There is also, of course, the fact that some asset managers may want to buy other managers for the distribution aspect, to expand their business into other countries.
Biville: There are many people with the ambition to create asset management firms based on their own new ideas, and I think this is something that makes the French market interesting.
We have created vehicles to take minority stakes in firms, especially those that extend our range of products.
I don’t think we really see this same level of vitality in other continental asset management markets. It’s a really strong characteristic of the French asset management industry.
Blanqué: Innovation has to meet shifts within demand. Take global equity. It is by far the largest area of the equity space with multiple investment drivers, themes and formats. Yet the bulk of the equity providers still act in local investment universes. This is fine, but there is a limit to the extent that can work.
Funds Europe: How does the future look? What are some of the industry’s main challenges?
Servant: Changes in distribution that are being induced by new regulations affecting the distributors will affect us as manufacturers. As manufacturers, we are not shielded by changes in distribution.
The US has shown that when distribution structures change, people will come back to you as a manufacturer and renegotiate their fees. Asset management has been a high-margin business for a long time and my feeling is that is going to change.
Blanqué: What is under our control is cost efficiency. Diminishing returns and competitive pressures mean we have to make sure that the ratio between costs and assets under management are properly managed.
Liquidity is a key issue. This asset management business has been mainly about risk and return, it is what we learned at school. Theory assumes that all assets are liquid at any time.
This has been denied by reality. The industry has to cope with this powerful third missing new dimension.
There is a looming crisis linked with the fact that, although there is excessive macro liquidity, micro liquidity is drying up at the same time that we have been seeing the proliferation of demand for income.
The fall in market-making operations by banks is driving a shift in market structure. The industry, together with the regulators, is expected to shape proper ‘liquidity policies’.
There is a risk side to it. But this also brings opportunities to capture illiquidity premia or distortions, one of the biggest changes in the industry.
Pinto: When I look at it at Axa IM, we still have a lot to do in terms of growth, especially in Asia. We have had great success in China and I think we can do more there and in Latin America. These are growing markets and I do believe that once you’ve started the globalisation journey, you can go as far as you want to with it as long as there is the means to do it well. But it means we need to constantly review our business to ensure that we focus on what we are good at in terms of products and services.
Blanqué: I agree with these challenges. There are compelling reasons for optimism. There is an impressive accumulation worldwide of savings and reserves, often parked in low-yielding assets – this at a time when there are many unfulfilled needs for investment. Our role is to help channel this excess of savings into the real economy and for the long run, giving clients access to new investment universes. The rising appetite for capturing illiquidity premia is one example. Our role in the financing of the economy is rising, and a game-changer. This is an exciting challenge, which can bring value to clients managing risk and liquidity.
Carrel-Billiard: As asset managers, we are going to work more and more for lower and lower margins. We’ll have to find ways to compress margins and to consolidate. So I guess the challenge for us going forward is about how to reshape business models. This might see asset allocators implementing more through ETFs or smart beta.
The fee formula may have to be rethought as well. There are a number of ways this could be taken forward so that the traditional ad valorem fee – the basic model used by the industry – can evolve.
There is also the challenge of direct versus indirect distribution, which gives an opportunity to reshape the business model.
I think what the future holds in store for many of us is consolidation, and for those who can think differently, possibly new ways to structure their business model.
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