Magazine Issues » November 2020

France: Catering to French tastes

AsparagusAsset managers in France still face tough competition from banks and money market products. Fiona Rintoul hears what some firms have been doing for this particular market.

Might there be a time when it no longer makes sense to write a report on the investment management industry in France, because France and other eurozone countries are completely integrated into a single European financial services market? For Pascal Duval, head of retail solutions at Amundi, the answer is ‘non!’. 

“If you scratch beneath the surface, you’ll find big differences,” he says. 

Divergent tax regimes and cultural differences mean that – although there are of course products that can be sold in multiple markets – it still makes sense to approach the eurozone markets individually. 

And, so, to France. France is more risk-averse than, say, Italy. And the presence in the market of capital-guaranteed insurance products that offer a “decent” return in the current low-yield environment of 1-1.5% returns, rather sets the agenda for other products. 

Other factors like levels of home ownership also affect what the product range looks like in different countries. France, like the UK, has a much higher level of home ownership than Germany, which dampens demand for real estate investment trusts (Reits). As Kevin Thozet, member of the investment committee at Carmignac, confirms: “In Germany, there is much more demand for Reits.” 

Meanwhile, the underlying macroeconomic environment in eurozone countries remains heterogeneous, which of course affects investors. France’s Purchasing Managers Index data in October was at a five-month low. In Germany, it was up, reflecting the country’s strong industrial base and the more buoyant sentiment in the manufacturing sector compared to the services sector.

These many differences “force asset managers to do micro customisations to macro products,” says Duval. 

Either that, or they may offer investors in France the choice between a French and a European approach. Through its ‘Anti-Benchmark’ France fund and ‘Anti-Benchmark’ Euro Equity fund, TOBAM offers both possibilities. 

“The ‘maximum diversification’ approach delivers on both universes,” says Christophe Roehri, TOBAM’s deputy CEO. “Ultimately the allocation decision belongs to the asset owner.” 

And the need for country-specific customisation is by no means confined to the retail market, with institutional investors’ allocation decisions moulded by regulations. In France, institutions are often governed by the insurance code, which, says Duval, is “very prescriptive” in terms of the types of assets investors can include in their portfolios. 

Add to this Solvency II, which introduces further restrictions due to higher capital charges for riskier assets when insurers hold them on their balance sheets. 

“Sometimes the capital adequacy they need to raise for equities is too taxing,” says Duval. 

Moving on from guaranteed products
So, which kinds of products do work in France? 

To entice investors away from capital-guaranteed insurance products – whose yields have been decreasing systematically over the past ten to 20 years and are now negative if you take account of inflation – Carmignac has been launching intermediate-volatility strategies. These might target volatility of 3-5% and a similar level of returns.

“This is providing investors with investment funds that are one step on from the guaranteed capital products,” says Thozet.    

Furthermore, some investors who took advantage of the rally in equity markets are now de-risking and moving into these intermediate volatility strategies. With credit spreads coming down, Carmignac has also seen clients moving into flexible fixed-income strategies.  

Another way to address the current environment in the French context is through a barbell strategy. Here, investors would have a large chunk of their assets in the capital-guaranteed insurance products with some complementary equity allocation. 

“That’s something we’re pushing,” says Thozet, who emphasises Carmignac’s long commitment to cross-asset strategies from its inception in 1989. 

Target-maturity funds also offer a viable and safe alternative in the French market to popular insurance products – and even cash. It’s important to find such alternatives because French retail investors have been pouring money into cash. An already high savings rate has been boosted by some €90 billion of new money, almost all of which Duval says is “locked into deposit accounts”. 

This is despite the fact that banks don’t actually want to have this money. “There has been a major uptick in savings, but none of it is filtering down into the real economy,” Duval says. 

Safety is the watchword here. “French banks don’t go bust,” says Duval. And so, if they are to succeed, competing products must also offer safety. 

Within the investment fund universe, too, money market funds – a perennial favourite in the French market – have seen inflows at the expense of other products. Figures from the Banque de France and AFG, the funds trade body, show that money market funds were the only asset to see an increase in assets in the first six months of 2020. 

Despite the low-yield environment, money market funds account for a whopping 39% of assets under management in France. They also saw net inflows of €8.1 billion, while other asset classes saw net outflows – the exception being equity funds, which attracted €3 billion.

In line with this, Carmignac reports some inflows into equity funds – particularly European equities and emerging-markets equities. European recovery funds have also seen interest. 

“The signalling for some form of debt mutualisation in Europe has made Europe a bit more attractive to investors,” says Thozet. “They don’t see it as just another area where there is only political risk.”

In the current volatile environment, there is perhaps also a better understanding of the value that active managers can add in both the fixed-income and equity sectors. 

“We have seen increasing interest from investors looking for core investment solutions without the risk of concentrations intrinsically related to market-cap weighted benchmarks,” says Roehri. “French investors after North America and Northern Europe are now accelerating their development towards active core solutions.”

Duval also notes increasing interest in private assets among institutional investors, describing this as “unavoidable” when ten-year yields are negative. Even within insurance contracts, this is the case, as Roehri notes. 

“The Loi Pacte [Pacte Law] in France has significantly progressed what may be eligible in insurance contracts in France,” he says.  “With that, for example, alternatives including private assets and cryptocurrencies are now eligible in some formats, and that should offer investors more solutions for diversification.”

Having a broader spectrum of real assets beyond real estate, which might include private debt, has also helped to diversify the companies present in the already highly competitive French market. 

“It has opened the doors to very niche boutiques,” says Duval. 

Boutiques now join a host of foreign players in France that are firmly embedded in a market that once seemed impossible to conquer for outsiders or for smaller firms. 

“France is one of the largest markets in terms of the number of global asset managers in Europe, while also having a strong number of small independent asset managers that deliver innovative products,” says Roehri.

The likely future trajectory is fewer large players and more smaller ones, as the financial services industry consolidates. By 2024, Duval believes there will be four bigger European banking champions. 

“They are too weak compared to US competitors,” he says. 

There has perhaps been less change among fund distributors, where banks remain powerful. Purely digital distribution is insignificant and financial advisers have a market share of about 10% –  although Duval believes that might double over the next three to five years. 

“Banks are retreating,” he says. “They are closing branches, and people still need to talk to someone.”

‘We like industrialisation’
ESG is a dominant theme in France, as it is almost everywhere across the globe now. 

“The move towards more sustainable and responsible investment solutions is accelerating, most notably on the retail side, as French institutional investors have always been pioneers in the field,” says Roehri.

Here too there are many country-specific issues and preferences. In France, which has traditionally been focused on environmental issues within ESG, the Covid-19 pandemic has recently brought more emphasis to bear on social issues. This is partly because one of the consequences of the pandemic is that more households are sliding into poverty. 

Accordingly, Amundi is launching products based on social bonds and a specifically French “solidarity” product that invests in not-for-profit enterprises. And across the ESG sector, product diversity is rising. Early this year, Carmignac converted its commodities fund into a “green gold” strategy which targets companies that actively contribute to climate change mitigation. 

ESG is also one area where greater product harmonisation across Europe may be expected. The European Union might introduce regulation that sets minimum standards for ESG products and clarifies obligations with regard to transparency and reporting.  

“Fund managers would support that because it is very taxing and costly to have to construct a fund in different ways for different countries,” says Duval. “We like industrialisation. We don’t like bespoke customisation for each country.”

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