Money managers in continental Europe feverishly are beefing up offerings and expanding portfolio management teams in preparation for the introduction of a single European currency.
"I think a lot of people are close to panicking in terms of their resources," observed Denis Bastin, a senior consultant with William M. Mercer Ltd. in London. "Right now I'm focusing on money managers. They're trying to gauge what they need . . ."
This frantic activity is particularly marked among firms in countries such as France, Germany and the Netherlands, which are likely to be in the first wave of economic and monetary union, slated for Jan. 1, 1999.
Among the changes firms are making:
A move away from country allocation toward sector analysis, using a bottom-up, stock-picking approach.
Planned launches of a range of pan-European equity offerings.
Investment in alternative fixed-income strategies.
An increase in the number of analysts and investment managers they employ.
An increased move toward cross-border consolidation.
Creation of the euro will create the second largest asset management market in the world, Alain Leclair, chairman of Association Francaise de la Gestion Financiere, Paris, said recently.
At the end of 1994, the European Union's 15 nations had $4 trillion in assets managed by insurance companies and pension funds, compared with $4.6 trillion in the United States and $4.15 trillion in Japan, he said.
As for mutual funds, Europe had $1.63 trillion as of Sept. 30, 1996, against $3.33 trillion in the United States and $404 billion in Japan.
Creation of the euro also will broaden European investors' scope of investments, experts said. The "home market effect" of investing 70% to 90% of assets in local assets will alter greatly, said Iain Saunders, deputy chairman, Robert Fleming Asset Management, London.
The impact will be most pronounced for European institutional investors whose investment strategies are tied to their liability structures.
"If you have European liabilities, you start to view your home market differently, and this could lead to more Europewide investing," predicted Talal Shakerchi, European portfolio manager with Old Mutual Portfolio Managers Ltd. in Hook, England.
Robert Lenselink, vice president of ABN-AMRO Asset Management in Amsterdam, has been leading the firm's "Euro Project" since April. The former head of the group's global fixed-income division now has six working groups under him looking at the impact of the single currency on the asset management division.
"We're working very hard to prepare ourselves," he said. The firm is revamping its offerings from equities to bonds in light of the euro.
European managers already are hot on the trail of developing pan-European equity offerings and altering their investment strategies.
Pan-European equity approaches
Rolf Knigge, head of equities at Metzler Investment, Frankfurt, said his firm is focusing on sectors rather than countries and it plans to launch a series of pan-European equity offerings shortly, using this approach.
In fact, once the single currency is introduced, most European money managers are likely to reject a country-by-country approach in favor of a sector bias. Moreover, some are discussing the possibility of changing existing investment guidelines with their clients once this occurs.
"It no longer makes sense to have separation of countries," said Ernst-Ludwig Drayss, managing director of Deutsche Asset Management in Frankfurt.
With the introduction of the euro, "it will go from domestic to European portfolios and then you need to add a global part as well."
Jean-Francois Theodore, chairman and chief executive of SBF-Paris Bourse, predicts creation of a single equity market in Europe. "The European Big Bang," he said, means "a new asset allocation will appear in Europe, based on a pan-European approach."
Some experts also think managers will carve Europe up into subsections. Brian Hill, a senior consultant with Watson Wyatt Worldwide, Reigate, England, said managers will treat Belgium, France, Germany and the Netherlands as a Northwest European region, and they will form a Scandinavian region.
A broader bond market
As far as European bond markets are concerned, as spreads disappear and there's less opportunity for high returns, many experts are predicting a U.S. scenario evolving with greater use of mortgage-backed securities and other forms of alternative instruments.
"We'll follow the U.S. and have very specialized market fragmentation," predicted John Pike, director of investment research with Commerzbank in Frankfurt. "Credit aspects will come into play between countries."
ABN-AMRO's Mr. Lenselink observed alternative fixed-income products are more risky than traditional bond investments, but have higher yields.
For this reason, he's looking for up to four more analysts to follow the debt sector.
Meanwhile, officials at Metzler Investment are keen to have sufficient equity managers to keep abreast of new themes and trends among Europe's small- and midcap stocks, Mr. Knigge said.
"We'll take on two to three (equity) managers over the next six months to a year," he predicted.
Furthermore, Metzler will create a specialist European equity team that is separate from the German equity team. The final structure has yet to be decided, he added.
Flurry in France
In France, meanwhile, there's been a similar flurry of Euro-related activity.
BNP Gestion, Banque Nationale de Paris's new money management unit, has been frantically hiring equity specialists. And, Caisse Centrale des Reescompte, a subsidiary of Commerzbank in Frankfurt, recruited two former Fimagest S.A. equity managers to start CCR Actions, a Paris-based unit specializing in European equities (see related story on page 16).
Elsewhere, Paris-based CPR Gestion recently has brought in Olivier Huby, formerly in charge of Banque Paribas' quantitative division, to develop CPR's equity business. Equities account for only 10% of the firm's 66 billion francs ($10.7 billion) in external assets under management.
Many believe the introduction of the euro will cause further consolidation within the industry in continental Europe.
"What will increasingly happen with the privatization of pensions is that the investment skills they have will fall behind what is required," observed Charles Outhwaite, an executive at investment boutique Phoenix Securities Ltd. in London.
Many international portfolios are invested in European equity investments, but once the euro is introduced, they will become domestic holdings, Mr. Outhwaite said.
"That's another spur to get international expertise and will lead to a number of acquisitions and further consolidation," he predicted.
Joel Chernoff contributed to this article.