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Magazine Issues » May 2009

FRANCE: Big opportunities for small managers

Significant restructuring among French asset managers owned by banks has increased the number of opportunities for smaller, independent investment houses. Angèle Spiteri Paris asks if the large houses still have any legs...

France is home to some of the most established international names in fund management. It is also home to some of the world’s most notable banks – many of whom own asset managers. With 25% of management companies there tied to the country’s banks (see Association column, p68), smaller independent investment houses claim that uncertainty in the banking sector is opening doors for them. They say that the institutional investors’ hunger for large corporations has waned after several firms linked to banking groups were dismantled or sold.

“The crisis has given investors a more realistic view of the asset management industry,” says Philippe Couvrecelle, chairman, Edmond De Rothschild Asset Management, which has €19.8bn of assets under management.

Yet even with a sizeable asset base like this, it is only recently that pension funds have opened channels with the business. Couvrecelle says: “Today we can speak with huge pension funds around the world.

Two years ago this was impossible because before the crisis if you were not big, you were not interesting.”

One industry observer says that investors have been let down by certain managers and do not want to give more money to those same firms. As a result, houses like Edmond de Rothschild and Carmignac Gestion, another independent French manager, are reaping the rewards.

Arguably, the interest in smaller investment houses is a result not just of the banking crisis, but also the polarisation between index-based funds and so-called alpha generators.

Managers are gravitating to one of the two sides of this spectrum. At one end are large-scale exchange-traded fund (ETF) providers offering indexed products. At the other side are those who specialise in trying to provide alpha.

Skill versus scale
This, together with an increased interest in specialisation, may have led investors to prize investment skill over scale, which may work to the advantage of smaller managers.

Couvrecelle says: “The key point for efficiency in equity asset management is not to be big, it is to have good people, the right organisation and the right control systems and architecture.”

In Edmond de Rothschild’s case, Couvrecelle says: “We have several key people and in this we are similar to big groups because we’re not a one-man business. But on the other hand, we have the flexibility and the reactivity of a small boutique. I think this organisation is very efficient for certain asset classes.”

Not surprisingly, larger firms do not agree that their smaller rivals are garnering that much attention.

Pierre Servant, CEO of Natixis Asset Management, which had €447bn globally at 31 December 2008, says: “In continental Europe big is beautiful again. All the big guys in Europe that belong to banks or insurance companies are doing very well.”
He says that a look at the inflows in the French market stands as a witness to this.

“We are at the top of the list, second is BNP Paribas, third is Banque Postale, a French retail bank. Next are Aviva,
Société Générale and AXA Investment Management,” he says.

Size matters
Dominique Carrel-Billiard, CEO of Axa Investment Managers (€485bn assets under management), argues that size provides benefits. “The virtue of size in our business gives you resilience and economies of scale and stability. Small boutiques are effectively tied to the fate of their asset class,” he says.

There is also a middle ground occupied by asset managers that fall between index and active management. Servant, of Natixis, says: “For those in the middle – what I call the traditional active manager with very high fees – it’s going to be very difficult. The performance above the index is not sufficient to justify the fees.”

Servant does not believe asset managers with banking parents fall within this category, but Couvrecelle, of Edmond de Rothschild, is of a different opinion. “We know from experience that the asset management companies in the middle are those of big banking and financial groups. This is because there are many constraints to deal with and it’s difficult to have a
small tracking error coupled with strong alpha generation.”

If there is only one thing that is clear, it is that the banking crisis has ripped right through the asset management industry in France, perhaps more than in any other country in Europe so far. But there are also problems for bank-owned firms that may go back to before the crisis.

Eduoard Carmignac, founder of Carmignac Gestion (€12.6bn assets under management), says: “There is an increasing recognition by many banks of their inability to sell their fund management abilities outside of their own network. So once you’ve come to that conclusion, the logic is to have the most cost-effective fund management operations for internal distribution.”

Does this mean bank-owned asset managers will retreat inwards, opening the way to smaller competitors?

In recent months Credit Suisse sold its third-party fund management arm to the UK’s Aberdeen Asset Management and Société Générale exited the long-only business and sold its asset management arm to Crédit Agricole Asset Management.
But according to Carrel-Billiard, of Axa, the moves of both Société Générale and Crédit Agricole are specific to their situations and do not point to a trend for banking groups to rid themselves of their asset management subsidiaries.

He says: “It’s difficult to generalise and make an overall rule out of these. They are specific examples and they reflect something that is perfectly rational for the people or companies involved. It may not be something you can generalise as being a rule of the industry.”

For Yves Perrier, chairman and CEO of Crédit Agricole Asset Management Group (Caam), which has €441.4bn of assets under management, the Société Générale decision to exit the business worked to his firm’s advantage. He says: “The crisis has been severe but the way that we are managing it has put us in a good position, which is one of the reasons for the deal with SGAM.”

With consolidation and uncertainty affecting big players, the independent firms’ stability could serve them well. This is not to assume that all smaller houses in France have weathered the storm unscathed.

Discussing the French boutiques, Anthony Finan, member of the management committee at BNP Paribas Investment Partners, says: “Many were overcome by difficulties during the crisis – liquidity and performance issues. When you are a mono provider you could serve on the rally on equities, but when there is a turnaround or problem you have a problem of profitability and client retention.

“What you’ve seen in 2008 [is that the] competitive position that most boutiques had against the large banks fell and disappeared.”

Whatever the case may be, the fact that smaller French asset managers are garnering interest from new clients cannot be denied.

In an effort to make the most of their expertise, smaller French firms have tended to hone their skill in particular asset classes and aim to offer the best possible product within that field. Carmignac says (see interview p16) his firm aims to be a market leader in its chosen sectors.

Track record
Larger asset managers might like to stick to what they know best in times of difficulty. But Servant, of Natixis, says: “Asset managers do not tend to think like this. When they do one thing well they think of doing something else to avoid being very dependent on one product. They want to diversify and sometimes they lose focus.

“In today’s culture you need a long track record because investors need to be reassured. They don’t want new ideas all the time; they want experienced and seasoned investment teams.”

But some managers cannot help making changes as a result of the crisis – the changes are almost made for them. Crédit Agricole Asset Management is one such firm. Perrier, of Caam, says: “Our asset mix is not the same due to the fact that our net outflows, which have been limited, were the result of a combination of a strong new collection in monetary funds and a decrease in absolute-return funds and equity funds.”

He adds that Caam aims to improve the productivity of its management teams, notably through reducing the number
of funds.

Finan, of BNP Paribas, says that as a result of the crisis the firm is focusing on three client segments with “three different set-ups and solutions because we don’t believe in the one-size-fits-all approach”. The three client groups are institutions, distributors and banking networks.

The merits of larger managers versus those of smaller boutique-style operations is a topic almost as old as the fund management industry itself, but the argument is refreshed by the banking crisis. It is clear that smaller managers sniff a real opportunity and they are going to fight for it.

©2009 funds europe