French asset managers could finally topple banks and insurers to crack the domestic retail investment market. Multi-asset, thematic funds and derivatives are the main tools for the job, finds Nick Fitzpatrick.
Given the choice between investment managers’ funds where capital could fall in tandem with equity markets, or bank and insurance products that can offer enhanced rates of bond interest – sometimes tax-free or with capital protection – most people might put their money in the latter. This is the case for many French retail investors, whose equity-owning culture is less pronounced than in other EU countries.
Industry data shows that in the second quarter of 2019, French equity funds had outflows of €4 billion – much higher than all other EU countries except Luxembourg (though Luxembourg funds have an unusually high number of non-domestic clients). The roughly 650 French investment managers can struggle to attract retail money for equity funds, according to firms that Funds Europe spoke to in Paris.
Insurers’ ‘euro-denominated’ funds offer low-margin business for certain asset managers, such as those with insurance arms. Guaranteed returns make insurance funds popular with the public compared to wider investment products.
However, things are changing as insurers find it harder to offer enhanced rates from underlying low yielding bonds.
In September, the insurer Generali France said it would cap the share of investment that customers can put into euro-denominated insurance funds at 40%. Jean-Laurent Granier, of Generali, told France’s Les Echos newspaper: “We don’t want to give an illusion that it’s possible to get a 1.5% return for a euro contract when risk-free interest rates are negative.” It was the first time an insurer had put a cap on these products. The move is seen as significant in the French asset management world.
A big change
Guillaume Lasserre, chief investment officer of Lyxor, a Paris-based asset manager with €156 billion of assets under management (AuM), says: “Guaranteed insurance funds are strong competitors for all asset managers in France, but returns have decreased over recent years and now the asset management industry may have the opportunity to propose an alternative. There could be a big change if distributors start to offer investment funds.”
He adds: “We won’t be able to find a substitute for daily guaranteed products. Success will depend on the distributors’ understanding of risk and ability to explain it. But if you’ve got something to compete with, it’s a good idea to promote it.” Lyxor is “working on” a conservative mixed assets fund with an equity portion of between zero and 25%.
Matthieu Duncan, vice-president of AFG, the French asset management association, says the range of investment accounts on offer in France generally does not incentivise the French public to choose riskier investments. There is a lot of debate at the AFG about this, he adds.
“Although the returns have been decreasing over the past few years, there are still returns of 1.5%-1.6% available on insurance products – and in some cases, that’s with a capital guarantee.”
Livre accounts, another example of what’s on offer, are offered by banks as a means to save for dream holidays or to fund school fees. Interest rates are fixed by the government for most Livres and in recent times have paid rates of between 0.75% and 1.75%, tax-free.
But interest rate pressure could help asset managers in France to connect better with retail customers. And there is another boon, too.
French firms have also applauded the government’s PACTE Law – a wide-ranging set of reforms covering defined contribution (DC) pensions and corporate finance that should come into force next year.
PACTE denotes the Action Plan for Business Growth and Transformation and even extends to creating a framework for crypto-asset investing.
In October, BNP Paribas Asset Management, one of the country’s largest firms, said it had created a new retirement solutions department to support DC business, citing PACTE as a reason for why pensions savings should become more attractive.
Gilles Cutaya, deputy chief executive at CPR Asset Management – which has €47.5 billion of AuM and is part of Europe’s (and France’s) largest asset manager, Amundi – says: “In French retail, firms mainly have to target the ultra-high-net-worth market because the equity culture here is still relatively small and DC is tiny. However, the new PACTE Law will incentivise pension schemes to invest in pensions and this will bolster the market.”
The outlook for French retail and DC pensions business now looks more positive. The insurance flows that will be diverted from euro contracts will likely go into unit-linked insurance funds, parts of which are invested in equities through asset managers.
Even before Generali pulled the trigger for this move, the French had already put more money into unit-linked funds than into guaranteed funds, beginning in 2015.
Stéphane Janin, head of global regulatory development at Axa Investment Managers, which has €757 billion of AuM and is part of the insurer Axa, says: “Insurance companies in France already propose to widen the assets included in funds offered through insurance wrappers, which would extend to a variety of instruments. Unit-linked life insurance products offer exposure to equities and other financial instruments through investment in funds, so there is an asset management component there already.”
More than half of French AuM was from insurers in 2017, according to recently published European Fund and Asset Management Association (Efama) data, and 87% of France’s asset management clients overall are French.
At the end of 2017, France held a 17% market share of European assets under management – a sum of more than €4 trillion, second only to the UK. Nearly 60% was in investment funds, the rest in mandates. But out of ten countries, France had the third-lowest level of retail investors, at 27%. Spain was highest at 84%.
La Française Investment Solutions (LFIS), with AuM of around €13 billion, has begun marketing a multi-asset fund to the public. It sees making the public comfortable with the fund’s risk-return profile as a challenge.
Sofiène Haj-Taïeb, co-founder and chief executive of LFIS, says: “Interest rates have become more and more negative but the Livre A [a traditional French savings account] has not gone into negative territory yet, so there’s still a challenge for asset managers, and given that last year was very difficult for multi-asset funds, it could be even more difficult this year to convince investors to switch from bank and insurance products.”
LFIS’s Perspective strategy is exposed to European equities and is based on an existing six-year-old strategy initially managed for an insurance company client.
“The biggest part of the return from multi-asset strategies comes from bonds, but this won’t be the same for the next five years. People will have to take risk on equity, but people fear multi-asset because half of it is in equities,” says Haj-Taïeb.
In an effort to reduce reticence among the retail public for stocks, he says LFIS will emphasise its ability to manage drawdown risk using derivatives.
LFIS’s other co-founder, Arnaud Sarfati, says: “The French equity investor is not invested in France, they are invested pan-Europe. The performance of the Eurostoxx, ex-dividend, has been zero over the last 20 years, so if you are long-only, you only make the dividend return.
“The Eurostoxx reflects how European equity is not very exposed to the new economy. This means you cannot expect great performance – but neither can you expect the market to fall by 50%. We can make the most of this scenario through derivatives and that is how we position ourselves.”
Although much of their AuM is from French investors, French firms have expanded internationally, with success.
Speaking to Funds Europe, Amundi chief executive Yves Perrier reiterates what he has always said in relation to the 2017 acquisition of Pioneer Investments: it made strategic sense, as the acquisition broadened Amundi’s distribution in Italy, Austria and Germany.
Since the Pioneer acquisition, there have been some strong flows from Italy. In 2018, the company had inflows of €4.3 billion from the Italian market, springing from a distribution partnership with UniCredit, the bank from which Amundi bought Pioneer. The firm has also benefited overall from retail fund flows in Asia, where Amundi has joint ventures.
In North America too, Fannie Wurtz, head of Amundi’s ETF, indexing and smart beta business, points to “strong demand” from Mexican clients and other non-Europeans for Ucits-regulated ETFs. The firm has ETFs listed there.
Meanwhile, LFIS has €4 billion in liquid alternative and multi-asset AuM. Of this, 90% is from institutional clients – and 70% is managed for non-French clients.
Sarfati says: “We have made breakthroughs in Japan and also in Canada, as we are trying to address the North American market. LFIS is a quant and many clients in the US are looking for these types of process– and risk-managed solutions.”
CPR AM, which specialises in thematic investment, says it is focused on Italy, Austria, Germany, Spain, Switzerland and Asia – largely in line with its owner, Amundi.
But Cutaya adds: “Last year we had a big campaign in Japan for our medtech thematic equity fund. This made sense because the population in Japan is ageing, so medical advances are a key thing for them.”
Given ultra-low and sometimes negative rates, he says retail investors see a role for thematic investing because long-term trends such as ageing or disruption are here to stay.
Despite some successes abroad, French asset managers are said to find the UK market difficult. Duncan, of the AFG, says: “There’s a feeling that the UK is a very large and important market for investment products, but there’s also a little frustration that it’s a tough market to crack. It can be hard to make inroads for any non-UK managers.”
According to Cutaya at CPR AM, one reason may be that French asset managers are less experienced at working with DC pension funds, a strong feature of the UK market.
He adds: “As chief marketing officer, I must have a strategy for the UK. It’s a very important market, so we have registered thematic funds there. A fund on education, for instance, would have wider appeal in the UK than a medtech fund.”
The CPR Invest-Education Fund, launched in 2018, targets the lifelong education market – including ‘ed-tech’. Spending in the global education market will double within 15 years to reach $10 trillion (€9 trillion), CPR AM says.
Not having funds domiciled in the UK under UK structures is also a barrier, Cutaya acknowledges, but the sub-advisory market is an opportunity that could help non-UK firms find clients.
Sub-advisory is seen in the industry as an opportunity created by MiFID II regulations, where – partly to manage complexity – distributors are setting up their own-branded funds and contracting out the management to third parties.
For the quant-driven LFIS, expansion in Europe has so far centred on Germany and Spain – less so on the UK. “I’m not sure that the quant DNA is something certain large institutional investors in the UK are as familiar with yet,” says Sarfati. He describes France has having a culture of quant investing and derivatives.
The AFG’s Duncan – who recently announced his resignation as chief executive of Ostrum Asset Management – says the French education system produces many graduates with quant and analytical skills.
Janin at Axa IM agrees, pointing out that Cédric Villani, one of the deputies in the National Assembly, won the Fields Medal – a hugely prestigious international prize, awarded to mathematicians under 40 every four years – in 2010. He was elected to the Assembly in 2017 as a representative of Emmanuel Macron’s party, La République En Marche!
“My view is that the big players in France are not biased towards quant,” says Lyxor’s CIO, Lasserre, “but certainly French universities are well known across the world for promoting high-level quant expertise.”
Quant has been through a difficult time, he adds. “Ten years ago, during the financial crisis, it was not a good time to be a French quant. People were fighting against black boxes, but it is coming back into the spotlight more now.”
Lasserre foresees a “more sophisticated” level of asset management as institutional clients face the pressure of low interest rates, which, in the case of insurers, will affect solvency ratios. “Instead of just being invested in liquid equities, they will have to optimise their solvency ratios and buy protection. They will have to use derivatives and active management, or some type of specialist asset management, for this.”
Lyxor, a firm that refers to itself as an “engineer” and “architect manager”, has already found opportunities as a provider due to changes in rules about over-the-counter (OTC) derivatives’ risk management and reporting. These changes were brought in by the European Market Infrastructure Regulation (Emir) in 2013.
“Emir forced firms to make changes to the operational set-up around over-the-counter derivatives and there are so many things to do now for an institution that they will, in some cases, want to delegate it to someone who knows. People are more keen to work with third parties and Lyxor has benefited,” says Lasserre.
“The choices for institutions are more complicated and they will have issues with Emir’s requirement for mark-to-market valuations.”
At LFIS, Haj-Taïeb says: “Some asset managers do not have tools to do derivatives and some are hesitant to, but at the end of the day, we see it as an opportunity for us.”
Paris is trying to attract more UK-based asset managers (see box). But with a retail market so stuck on bank and insurance products, would they really want to make that move?
New opportunities from PACTE, coupled with interest rate pressure, might just do the trick – and a mix of thematic funds, derivatives, quant and multi-asset would be the right tools for the job.
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