Sous pression

Regulatory constraints and lack of diversification in the French money management industry might be putting additional pressure on an industry already under threat from difficult market conditions globally, according to a Fitch Ratings report published earlier this month.

French money managers — which reported an aggregate of €2.5 trillion ($3.3 trillion) in assets under management at year-end 2007 — also need to better align their investment offerings with the needs of institutional and retail investors. Absolute-return and enhanced cash management strategies are both strategies that “are being particularly challenged and should be significantly reviewed,” according to the report, “French Asset Management Industry Dynamics and Challenges.”

“The five largest asset management firms in France account for 55% of the (total) assets,” said Charlotte Quiniou, director at Fitch Ratings’ fund and asset manager rating group based in Paris, in an interview. In comparison, the top five firms in the U.K. manage 25% of the total assets.

“Then you have quite a large group of independent players, who are now at a turning point,” Ms. Quiniou added.

Asset allocation strategies remain relatively conservative. About 57% of total assets are concentrated in fixed income, money market and enhanced cash strategies. The remainder is mostly invested in equity, with about 3% allocated to alternatives, according to the report.

Among segregated mandates, which comprise about 40% of total assets under management in France, only 25% is invested in equities, compared with a 40% average in the rest of Europe, according to the report.

“France has one of the largest asset management industries in Europe, but investments are biased toward conservative asset classes such as money market and fixed income,” Ms. Quiniou said. “Asset allocation is not going to dramatically shift (towards less conservative investments) in the short or medium terms.”

In the current market turmoil, investors are looking for prudent solutions, she added. Regulatory constraints also limit the ability for most pension funds and insurance companies to allocate to less traditional asset classes.

For example, certain funds are not allowed to have more than a certain percentage of their total assets — such as 10% — invested in alternatives including hedge funds of funds, real estate and emerging market equity. Among insurance companies, at least 60% of their total portfolio must be invested in fixed income. In order to circumvent these constraints, some institutional investors use structured products to gain additional exposure to alternatives “even though this comes at an additional cost compared to a direct investment,” according to the report.

About two-thirds of the French market is dominated by retail strategies, while the institutional business depends on several dominant players. Major pension institutions include Agirc-Arrco, a multiemployer pay-as-you-go pension platform with about €42 billion in contributions in 2007; Fonds de Reserve pour les Retraites, which had about €34.5 billion in assets under management at year-end 2007; and the Etablissement de la Retraite Additionnelle de la Fonction Publique, which had €4.7 billion in assets under management at year-end 2007. Based in Paris, these institutional investors are also less likely than their European and American counterparts to outsource money management duties, Ms. Quiniou said.

Because of a relatively small group of institutional investors such as corporate pension funds that largely manage assets in-house, independent firms have been much slower to emerge.

On average, about 25% of the aggregate institutional assets in France are externally managed compared with 66% in the rest of Europe, according to the report, citing data from London-based investment consultant bfinance.

It wasn’t until about 2003 that independent players “really gained momentum,” according to the report. Furthermore, these investment firms have highly specialized strategies, which makes them more vulnerable when such strategies “fall out of favor.”

“Most will have to look for sources of diversification in terms of their investor base,” Ms. Quiniou added. “They may need to expand abroad if they haven’t done so already. With a few exceptions, (independent) French asset managers are still directing most of the focus towards a domestic clientele.”

For non-domestic managers, it remains difficult “to break into the French market,” according to the report. At year-end 2007, non-domestic managers managed 15% of the total assets. However, some are making inroads by hiring domestic teams or acquiring local firms. Last February, for example, UBS Global Asset Management finalized the acquisition of Caisse Centrale de Reescompte, a Paris-based manager with about €13.3 billion at year-end 2007. CCR’s capabilities focus on money market and European value equity strategies.

Timothy Blackwell, head of continental Europe at UBS Global Asset Management based in Paris, said the transaction helped expand the firm’s institutional and retail clientele.

“We had been a player in the French market for many years,” Mr. Blackwell said. “In order to truly build long-term presence there, we felt like we needed to take a step forward. With the acquisition of CCR, we gained a much broader local presence, which is highly complementary to our own position, both from an asset management expertise level and a distribution point of view.”

Other overseas managers have succeeded by offering niche strategies that are not necessarily broadly available from established French managers. For example, Henderson Global Investors Ltd. of London has been gaining assets in specialist strategies such as an Asia dividend fund. Another offering is the firm’s European growth equity strategy; a majority of offerings in France tend to focus on value equity investments, said Patricia Kaveh, Henderson’s head of sales based in Paris.

“When we entered the French market (in 2002), we didn’t try to compete with the big groups,” said Ms. Kaveh, whose firm has about €800 million from French clients in assets under management as of the Sept. 30. “What we did was to find the best customers for our niche specialisms.”