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October 20, 1998 French investors spared by equity losses : Old style institutional investors gained from bond exposure. |
1998
remains a good year
The summer market storms are more and more
seasonal. But they still take everybody by surprise. "Even the money managers,
who have many options to hedge their investments at virtually no cost didn't
do it", points Dominique Hartog, CEO of Véga Finance, a subsidiary
of Caisse des Dépôts in Paris. But the market drop had just cancelled
previous gains for the year, notes Hartog. So after the market has bounced back
some 15% from its lows, he considers 98 remains a good year, and even a very
good one for bonds. That difference is probably what makes French institutions
feel so immune from the equity slump, as they mostly invest in fixed income.
The specific of French institutions also relatively insulate them from intra-year worries. "As their accounting usually goes on an annual basis, they only have to take provisions for market losses at year end", hints Hervé Douard, partner at Fixage, an asset-liability consulting firm in Paris. As long as the Paris Bourse didn't really drop below its year opening level, institutions were not threatened. "What hurts more institutional investors is the interest rates drop" mentions Hervé Douard. With 10 year government bond yields plunging below 4% in early October, most institutions faced a huge dilemma to invest new cash flows.
Many
institutions reinvest their proceeds
To that regard, the market drop gave them some incentives to increase their
equity exposure at lower costs. "Many institutions remained buyers at the
end of August, and haven't stopped buying until now", observed Jean-Claude
Leconte, president of Image & Finance, a consulting firm which surveyed
French institutional investors earlier this year. The 70 institutions he studied
had 75% of their long term assets in bonds, almost entirely French, and 25%
in equities, of which three quarters at the Paris Bourse. Such a little exposure
to equities, and international markets in particular, shielded them from the
turmoil. But
even those who had sold at market peak feel now forced to reinvest their proceeds.
"We had taken advantage of the market rise to sell a part of our convertible bonds and equity exposure, but not all of it, because other investments were hard to find", says Jean-François Naud, CEO of MAVPS, a mutual company with 45 billion francs (6,8 billion euros) in life insurance assets. After having parked most of its gains in cash, MAVPS considers investing in equities again. But only with that caution French investors always had toward the Bourse.