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Written July 13, 1996
Surprisingly, French asset management firms are not as lucky as one would expect. They do enjoy a strong domestic market for their services: France's asset managers currently oversee an estimated $800 billion in assets, with roughly 70% of those in open-ended investment funds, creating the second-largest mutual fund market in the world, runner-up to that of the US.
impact outside France
But compared to their counterparts in other countries, French management firms often appear weak. This situation is becoming dangerously worse. Recent changes in France's laws and economic situation threaten to stall growth in the country's mutual fund industry. Various political forces continue to block creation of funded pension schemes that could offer significant opportunities to France's asset managers. And French money managers are increasingly worried about fending off competition from foreign providers as the European Union's haphazard march toward unification creates more of an open market for financial services on the continent.
Faced with increasing competition and stagnating growth at home, France's money management operations have been forced to look for opportunities overseas. But they have made little impact outside France. With the notable exceptions of AXA-the French insurance giant, who counts Alliance Capital Management among its subsidiaries and oversees $260 billion in total-and banks Societe Generale and Banque Paribas, French firms aren't major players in the largest marketplace for asset management services, the US. And SoGen and Paribas themselves only account for some $6 billion under management on behalf of American clients.
To understand the paradox of these French giants handicapped abroad, a look back at their golden age is necessary. For a long time, big banks and insurance companies, which until recently belonged to the state, enjoyed the lion's share of French savings. The market was closed, and nobody wondered about its future: branch networks had a near monopoly of fund sales and insurance companies picked up the remainder with endowment policies.
The French market continue to show some signs of this lack of competition: banks dominate distribution channels for open-ended funds such as SICAVs and FCPs. A 1995 survey by Europerformance found that roughly 85% of open-ended funds sold directly to the public are controlled by banks, with only 10% offered by independent fund management complexes-some of which are themselves controlled by banks, further cementing their grip on distribution. Of the roughly $540 billion in French open-ended funds, about $100 billion reside with the three heavyweights in the SICAV business: SoGen, Credit Agricole, and Credit Lyonnais.
marketing doesn't sell in France
Alternative distribution channels are very weak. Insurers account for roughly $25 billion of the market. Another tiny slice belongs to independent financial advisors, of which France has roughly 1,500. (IFAs normally split the load fee with the fund provider.) French brokerages have traditionally focused on selling individual securities rather than pooled vehicles, leaving that to the banks. And since deregulation in 1989, French banks have purchased most of the country's brokerages; brokers now often only sell the funds created by the banking parent.
Most of France's investment vehicles are load funds: the load fees hover around 3.5% for equity funds and 2% for fixed income offerings. There are some challengers to the status quo. Since 1994, two "savings supermarkets" have been created, inspired by Charles Schwab's OneSource service: Centrale des Placements-from Cortal, a Banque Paribas subsidiary-and Vega Finance, a subsidiary of Caisse des Depots et Consignations, smaller than Cortal but with a more aggressive marketing policy. And Cortal recently launched the first no-load fund, managed by Invesco France. But participation in these supermarkets is expensive: fund managers often surrender sales fees-and portion of management fees-to the distributor.
The French are still wary of the direct marketing of financial products. Scandals with direct sales of money management services from Germany, Spain and Luxembourg have dampened prospects for no-load marketing in France. And most French won't even talk about SICAVs or FCPs over the phone, much less media like the Internet. But some offbeat methods of selling have sprung up: the French, after all, are familiar with their supermarkets. Carrefour, the food retail group, manages and sells a money market fund which was the largest FCP in the country in 1994, with FFr13 billion under management. And other retailers have been quick to follow like the Galeries Lafayette, Conforama or the catalogue company La Redoute.
legislature continues to debate...
Independent money managers-most notably, subsidiaries of foreign-owned firms-have been fighting hard against the big banks' cartel. One method has been to offer management services to banks as fund subadvisers: the largest independent, Fimagest, has thrived by offering services to small banks like Banque Parisienne de Credit (but under French convention, the assets under management are credited to BPC, not Fimagest). Independents even pushed lawmakers to pass a law in 1990 that would have allowed funds to be listed on the Paris Bourse, making their marketing and distribution easier. But under the big banks' pressure, the Ministry of Finance never wrote the decree of application. So the law remains a dead letter.
The French legislature continues to debate how they will implement the EU's Investment Services Directive-but the current enabling laws under discussion eliminate Article 99, or Maison de Titres, designations, which allowed management firms to do some interbank operations, like money markets and securities lending, as well as to offer deposit accounts and custodian services to their clients. The proposed law will oblige them to give up this status for a Societe de Gestion de Portefeuille (SGP) designation, which is a pure money management firm without any custodian services, and which can't collect its clients' subscriptions directly. Independents in France would suffer if the law passes.
Even money management professionals at French banks admit the legal system is stacked against them. "Our profession doesn't have a strong organization," sums up Alain Hindie, director of asset management at Credit Lyonnais, one of France's largest banks and still majority-owned by the state. "We need a simple and adapted legal environment. It has to begin with the definition of the basis of our job, which means, what is the management mandate." Facing such an identity problem, all decisionmakers in the profession are rallying behind the Paris equivalent of America's Investment Company Institute, the Association des Societes et fonds francais d'investissements, which will determine measures needed to consolidate French asset management.
can arouse Anglo-Saxon ambitions
For most of the big bank networks, the number one objective is the Euro currency. The polemics surrounding the ISD give it an anecdotal aspect, but it is truly one of the keys to the big common market that will come into existence with the implementation of the Euro. Theoretically, the monetary union of 1999 should transform a variety of local financial markets into a huge common market where every financial product will be labeled in the same currency and compete in the same rankings. French asset managers will find themselves competing with UK money managers-which have much longer track records in the industry-and German banks-which have recently poured billions of dollars into buying asset management expertise worldwide.
Consequently, French asset management executives are feverishly preparing for EMU. One way has been to start seeking other European clients. "We have signed an agreement with a Spanish bank to sell our products," said Philippe Collas, the recently appointed director of asset management for Paris bank Societe Generale. "We have an asset management subsidiary in Germany, called Veritas SG, which has an agreement with an insurance company to distribute Verivaleur, our local German equity fund." Societe Generale also owns a Greek subsidiary, Kosmos SG, whose sales are exploding thanks to an influx of wealthy people in the region.
Societe Generale is also putting its hopes in its Luxembourg subsidiary, Sogelux, which manages FFr3 billion. That's not much-the tax-sheltered Luxembourg funds market, fifth-largest in the world, amounts to over FFr1.5 trillion-but the strategy has improved. The fund range will be expanded from 18 to 37, and will include an off-shore clone fund of the famous SoGen International Equity fund, managed in the US by Jean-Marie Eveillard.
But French executives know well that they won't be the only ones to go after these new European opportunities. "The Euro is an extremely important phenomenon that can arouse Anglo-Saxon ambitions," thinks a director of Credit Agricole. "They are the only ones to have the critical size and skills for a market of that scale." It is true that nearly all Anglo-Saxon groups already have a reasonably active subsidiary in Luxembourg, including the world's largest money manager, Fidelity Investments of Boston.
significant positions on the North American side
So the battle must extend beyond European frontiers-and it promises to be tough. Here, behavior of French groups is much more varied. On the North American side, rare are those who have built significant positions. CDC Gestion, the asset management subsidary of the Caisse des Depots et Consignations, is the largest asset manager in France and one of the largest in Europe, controlling some FFr900 billion. But it hasn't succeeded in gathering a sufficient commercial team to set up on the American continent: CDC Investment Management, based in Connecticut, manages only $6 billion.
The French insurance giant AXA is a world-class player, gaining its asset management expertise through its purchase of insurers worldwide. Almost 60% of its assets under management are controlled by Alliance Capital Management, in which AXA secured a a majority stake through its purchase of Alliance parent Equitable Cos. Alliance's global presence has been supplemented by AXA's own money management operations in Europe and those of AXA subsidiary National Mutual in Australia.
"AXA has two jobs," explains Jean-Pierre Heilbuick, president of AXA Asset Management Europe. "Insurance and its related business: asset management. In the United States, we manage more assets for third-party clients than for our own insurance business. So, asset management deserves to be considered as a business in itself." Among the $150 billion managed by publicly traded Alliance Capital, no more than $30 billion represents the general account of Equitable assets.
After letting its American asset management sleep for a long time, Societe Generale officials say they now want to commit the necessary means to its development. SoGen's Jean-Marie Eveillard manages four mutual funds in America, with assets under management exceeding $4 billion. While the success is the US institutional market has been less pronounced, SoGen officials privately say they are planning to redouble their efforts, probably by offering an international equity product managed by Eveillard to US institutions.
In the US institutional asset management arena, Paribas Asset Management, the subsidiary of Banque Paribas, has probably been the most successful in organically growing stateside business. "Among the 250 billion francs we manage in 60 countries around the world, 60% belong to foreign clients," explains Alain Leclair, president of PAM. "We have four people in New York and have already won three or four management mandates for pension funds. " The asset management arm, some industry observers say, has become attractive enough to make other French banks contemplate a hostile takeover of Paribas.
But Paribas executives apparently have been divided as to how they could expand their American business. At presstime, there were reports that Paribas Asset Management chief Richard Wohanka had decided to take another position within the bank after his bosses failed to approve his plan to acquire a US money manager. Paribas Asset officials reportedly spent a year exploring acquisition opportunities in the US; now, sources say, Paribas plans to move forward through organic growth only.
The French haven't explored many transatlantic joint ventures to build business. For one thing, they've realized many failed. The most notable Franco-American joint venture to date-that between Banque Nationale de Paris and New York fund manager Neuberger & Berman-showed lackluster results and unwound last year.
Credit Lyonnais has made an association with Keystone Investments of Boston to manage a world growth fund. The fund has collected $500 million in the US and only $65 million in Europe, but the two companies still share the management fees they receive equally. Apart from this cooperation, Credit Lyonnais isn't thinking of closer partnerships for the moment. "We could think of it if we were seeking a distributor to increase our international development capacity," admits Alain Hindie.
Another joint venture-that between Credit Commercial de France and Mellon Bank-also has failed to generate significant business since it was forged in 1992. Mellon Capital Management, a subsidary of the Pittsburgh bank, had at one point secured some $250 million in assets to manage through CCF-Mellon Partners. But CCF's asset management units had failed to win over any US clients. This summer, Mellon Capital will purchase 10% of CCF-Structured Asset Management, the Paris bank's primary institutional asset management subsidiary, and start codeveloping products with CCF in an attempt to jumpstart the joint venture.
CCF has been one of the few French banks to attempt to grow its business through acquisition-it manages some $32 billion worldwide, counting London's Framlington Group and Tokyo's Japan Gamma Asset Management among its subsidiaries. Yet some wonder why it sold its 45% stake in the US asset management firm Pilgrim Baxter & Associates, which was lock-stock-and-barrel purchased by money management operating company United Asset Managment last year.
"It wasn't a bad deal," claims Alain Dromer, president of CCF-Gestion. "Pilgrim Baxter was a subsidiary of our British subsidiary Framlington. Between the moment they bought it, in 1988, and the one when we sold it, in 1995, its value had tripled, from $1 billion to $3 billion. Secondly, the management owned 55% and wanted to sell to United Asset Management, that was only interested for 100%. Our choice was limited. Lastly, we had analyzed the market and realized that what is the most important is distribution and client service. And this firm was not teaching it to us. They were more a niche investment boutique specialized in small-caps."
After this episode, CCF wasn't long in reorganizing its American strategy. First stage: all asset management activities of the bank were consolidated in CCF-Gestion. "Subsidiarizing allows to link partnerships more freely and efficiently than when you're a bank department submitted to a heavy hierarchy," Dromer said. And the bank now seeks to further strengthen its relationship with Mellon. "Our approach is similar to Mellon Bank's," says Dromer. "They have nine different and competing asset management companies, of which seven are quantitative-minded, and the two others are Dreyfus and Boston Company.
" If French management firms are often weak in the United States, their success in the rest of the world is sometimes unexpected. Who would guess that CCF-Gestion is the largest asset management firm in Brazil, with $5 billion under management? Credit Lyonnais International Asset Management claims some $600 million under management in Tokyo, Hong Kong and Singapore, and it recently signed an agreement with Nomura Securities subsidiary Kokusai to sell Japanese investors the international product co-managed with Keystone. And who would imagine that BNP is the largest foreign bank in Hong Kong, with 2,000 employees? "We are going to be strong in asset management as well," claims Gilles de Vaugrigneuse, BNP's director of asset management. "We have the clients, we only need to organise our distribution to make it work."
Other French firms have made inroads in the Far East. Paribas Asset Management was the first continental European bank to get a license from Japan's Ministry of Finance in 1986, after which it raised $1 billion to manage from insurance companies. Societe Generale is also catching up: in January, it established a subsidiary in Singapore, called Societe Generale Asset Management Asia, with 12 people to start. In early April, SoGen signed an agreement with British bank Standard Chartered to sell their products in Asia and the Middle East. AXA has also a strong presence in the Pacific Rim, since it bought National Mutual Funds Management and its $20 billion of assets under management.
"There are two world-size groups in France: AXA and Societe Generale, says Frederic Jolly, managing director for the Paris office of pension fund consultants Frank Russell Co. "They have money, good management, and are committed to developing their asset management activities. Credit Agricole also has a lot of cash, but asset management only seems to be a by-product of their banking activities."
the French market with French products
It should also be observed that before conquering the world, French management firms still have to fight to protect their own domestic market share. Even if it has been a little precarious with the drop in short-term rates, the French asset management market still arouses greed. Yet it is not an easy market to penetrate.
Most of the French banks will never engage in a partnership to sell a foreign brand in their thousands of branch networks: Many American firms have tried to sign up partnerships with Credit Agricole for years without any success. Even if French banks are generally not in good shape, they know their network is priceless in term of distribution, and are not ready to give it up to suppliers competing with their own products. Even Fidelity failed in its first attempt to get into the French market in 1987; it came again in 1995 with a more progressive and adapted strategy of marketing its Luxembourg range of funds. But some say French people won't buy them easily.
Most observers believe only two American-affiliated firms have succeeded in France until now: State Street Global Advisors and Invesco, a UK listed company that derives most of their revenues and profits from America (and is led by American Charles Brady). Their secret: be French before all.
"When we created Banque State Street in France, it needed an appropriate model. If one doesn't enter the French market directly with French products, there is not any market," explains Monique Bourven, president of Banque State Street and leader of SSGA's French unit. Bourven led asset management at Credit Agricole from 1969 to 1990, then came to State Street with her business plan. They immediately signed her.
At the time, it was a double wager for State Street. It was the first time they were setting up a local asset management team-other than marketing only-outside the US. And it was the first time they were addressing the retail public. The SICAV State Street Emerging Markets was offered to the French public in December 1991, while Seven Seas-State Street's US mutual fund family-only launched its emerging market fund in 1994. This strategy proved to be the right one in 1993, as the whole State Street SICAV range won the Corbeille d'Or, a performance-measurement award closely followed by the public.Total assets under management today reach FFr7 billion.
Invesco France quickly followed the same strategy. After having tried to sell foreign funds, it now experiences a better success while selling the French standard SICAV. The Sicav Invesco Actions Francaises, managed from the London headquarters by a French manager, has won the best performance among French equity SICAVs in 1995. Because of the fund's prominence, it will surely bring in more money and reputation than if it was an unknown, even outperforming, Luxembourg fund.
marketplace for foreigners
But French regulations for asset management products-overseen by the Commission des Operations de Bourses, the Paris counterpart to the SEC-are labyrinthine and often trip up foreigners. Specific fiscal rules of life insurance and other products, as well as social rights of employees' saving plans, create many traps to avoid carefully.
The French institutional asset management marketplace remains one of the toughest in the world for foreigners to crack. Like Switzerland, most French institutions have relationships with "house banks," which they hire to provide all banking services, including asset management-an arrangement that greatly favors domestic banks.
French asset management is certainly not organized-or dedicated to investment process-as Anglo-Saxon standards would require. If foreigners can prove dedication to process results in improved (or at least consistent) performance, they could have an edge.
Another weakness of the French banks that are involved in asset management is that they haven't isolated this particular business in an independent subsidiary. "When a regulation is implemented, the required criteria will eliminate many inefficient structures," predicts Hindie from Credit Lyonnais. But until then, problems that affect the bank-witness difficulties at Credit Ly-affect the asset management operation.
And just as the French institutional arena is tough to penetrate, there are also disincentives to do so. For one thing, it's small-maybe $200 billion, by generous estimates. "There are no pension funds yet, and the second-tier pay-as-you-go retirement systems only entrust 20% of their money to an independent choice of asset managers," explains State Street's Bourven.
Therefore, a tough price war is being engaged between competitors. And consultants have an unexpected deflationary impact. "Clients are reluctant to pay for a consultant service in France, so the latter justify their bills by arguing they can reduce the management fees when they organize a tender offer," clarifies CCF's Dromer. "As a result, asset management is less profitable in France than anywhere else, and cheaper than in the US, although American competition is stronger."
For a passive quantitative mandate of $1 billion, the management fee will be zero. The manager will only make his profits on some securities lending operations. "French management fees in the institutional sector are on average 20% lower than in the US," confirms Russell's Jolly. "Instead of marketing their outperformance over a benchmark and selling it, French asset managers have argued for lower fees....Many of them now recognize that they have badly educated their clients.
are 20% lower than in the US
" That doesn't stop suppliers rushing to offer their services, albeit demand is virtually not there. "Banks don't make money anymore with their traditional activities, so they think asset management is a low-risk, low-cost activity that requires few investments and employees, and brings in cash flow every day," says Paribas' Leclair. "They underestimate modern asset management standards, which require a lot of expertise and investments."
But the traditional high profit margins of the asset management marketplace-35-40% in the US and UK-disappear in France. Performance analysis software costs a fortune. "We had to develop our own system because external solutions weren't satisfying us," explains Leclair. The Paribas Asset proprietary system cost FFr50 million, and the PAM technology department employs 30 people full time. There are high tariffs on technology, and salary overhead approaches 80% in terms of benefits and taxes. The annual budget for an asset management firm is estimated to be at least FFr100 million, which implies a break-even of FFr100 billion of assets under management to survive. With FFr200 billion under management, AXA Asset Management Europe earns FFr200 million in annual revenues and has FFr175 million in expenses.
As a result, some argue that there should be consolidation: those who won't have the means to keep modernizing their organization could be forced to sell out, or seek a partnership. For the moment, only Groupe Suez seems to have clearly chosen this way. After having shed its 75% stake in British asset manager Gartmore Investments and its share in Fimagest, Suez sold all of Banque Indosuez earlier this year to Credit Agricole, including FFr100 billion of assets under management. Banque Indosuez also controlled a 30% stake in Banque CPR, which has an additional FFr64 billion of assets under management. The remaining 70% of CPR-which trades on the Paris Bourse-was rumored to be an acquisition target at presstime.
are buying a French presence
Such moves, at first glance, would indicate that French asset managers could be snapped up by foreign acquirers with deep pockets, and that has been true to some extent. German banks have sought to penetrate the French market through acquisition, with Westdeutsche Landesbank buying Banque d'Orsay, and Commerzbank purchasing Caisse Centrale de Reescompte and placing its professionals in charge of all money market fund management for all of the Frankfurt bank's European clients.
But Germans have a universal banking culture which is more suitable for this kind of marriage. For American asset management professionals, the choice is more restricted. "The problem is that there are very few independent asset management firms in France that are only specialized in this business and don't have other banking or securities activities, which render acquisitions more difficult," affirms State Street's Bourven. "Some establishments have been for sale for a while and haven't found any acquirer."
Consequently, French asset management professionals find themselves in a dilemma. They can either attempt to maintain bank-controlled locks on distribution channels-thus holding their market share but possibly destroying opportunities to grow it. Or they could forge relationships with foreign money managers, gaining the expertise and channels to become global players-at the risk of losing dominance in their home market.
"All the ambiguity of this job is that it requires at the same time to be very global and very local," says Heilbuick of AXA Asset Management Europe. "Think global and act local, is our motto."Gilles Pouzin