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July 13, 1996
French SICAVs history :
An overripe market.
France is regarded as the second-largest market for open-ended investment funds in the world, only behind the US, with French funds containing some $540 billion at year-end 1995, compared to $2.8 trillion in the US. But it's even more impressive in relative terms: a survey completed in 1990 showed that the French were the biggest owners of mutual funds in the world, with nearly Ecu5,000 of funds per capita, as compared to Ecu3,200 for Americans and Ecu2,000 for Japanese.
But recent events have stalled further growth of France's open-ended funds business, and the lack of coherent asset pools among French institutions may dampen prospects for growth of Paris' asset management industry.
market in the world
Asset management didn't develop in France as early as the industry did in the UK or US. French investors-who take very seriously their roles as stockholders-traditionally have been more interested in buying individual securities than parts of pooled vehicles. At the beginning of the century, French savers were enthusiastic about buying equities to finance exotic projects like the Panama and the Suez canals, or some Russian railways. And wealthy individuals preferred to invest in a selection of more-or-less risky bonds. Even today, individuals have been the largest group of shareholders buying parts of privatizing companies.
The first type of pooled management only appeared in France in 1945, with the launching of SICAFs-societes d'investissement capital fixe-which were basic, closed-end funds. SICAFs, listed on the stock exchange, never met with great success: they looked more like wealthy families' management clubs than pooled funds managed with transparency on behalf of the public. They ended their career as deeply discounted holding companies, and the last ones were ousted from the Paris Bourse in the early '90s.
mutual funds started in 1964
The first open-ended funds were only launched in 1964, when the famous SICAV-societe d'investissement capital variable-came into existence. Open-ended funds were recommended by the Lorrain report, penned by a chairman of Societe Generale. The industry began with only eight SICAVs, compared with an astonishing 1,083 registered at the end of 1995, holding some FFr1.6 billion.
Another great step forward was made in 1967, when the April 17 law instituted "employees sharing of expansion benefits," one of President Charles De Gaulle's ideas to make workers participate in a new form of "popular capitalism." To achieve this goal, French authories created fonds communs de placements. FCPs were simpler pooled management tools, like trusts, and in 1978, the government allowed the public to invest in FCPs directly as well as through their employers.
SICAVs and FCPs are both open-ended vehicles with some regulatory differences. SICAVs are considered companies, and law requires shareholder meetings (few attend, and fewer vote) and annual reports, adding to the administrative costs of creating one. A company needs FFr50 million to launch a SICAV, while only FFr2.5 million is necessary for an FCP. But SICAVs are more prestigious-and followed by the trade and general press. SICAVs are also required to cash investors out upon demand, while the liquidation rules for FCPs are somewhat less transparent. Therefore, most banks focus on their SICAV businesses: at year-end 1995, France's 3,813 public FCPs account for only FFr951 billion under management, and the 3,800 employer-sponsored FCPs only held FFr125 billion.
boosts Money Market funds in '89
If it started late and slowly, the French funds management industry now plays an essential role in national savings management. Of the roughly $800 billion in assets under management in France, more than 70% is in pooled funds. Heavy public investment in open-ended vehicles began with the introduction of some fiscal incentives to buy French equities. The Monory Law of 1978 gave an abatement to individuals who bought French equities or funds investing in them. The second major innovation came in 1980, with the introduction of money market funds.
But the funds' real success only began after 1989, when capitalization funds were authorized. Before, every fund had to distribute their revenues to fund shareholders, who had to pay income tax on these financial revenues. But new regulations allowed funds to capitalize all their revenues, so the holders would only be taxed when selling the fund with a capital gain. And during the early '90s, an individual's funds or securities capital gains were exempt from tax if they totalled less than $60,000 a year. Tax on capital gains was only 17% then-compared with an income tax of up to 56.8% on the higher revenues. As inflation was low and short-term rates still neared 10%, everybody rushed into the money funds: assets under management exploded from FFr13 billion in 1982 to nearly FFr1.3 trillion by 1993. And the proportion of money funds, either SICAVs or FCPs, went from 23.3% of all assets under management in 1982 up to nearly 50% in 1993, the last year of high short-term yields.
But everything began to topple over when short term rates fell from around 9% in 1993 to 3.5% in 1996. And the government-seeking deficit reduction-eliminated the fiscal incentives, and hiked the capital gains tax to 20%. So money funds assets began to decrease slowly. Because of fixed income funds net redemptions, SICAV assets under management shrunk in 1994, and money funds shrunk another FFr96 billion in 1995.
investors are hesitantt
Private investors are now more hesitant than ever, because other alternatives are also less attractive. The 1994 bond market crash frightened those who thought it could be a hedge against a fall in short-term rates. And the gloomy economic climate has paralyzed the stock exchange for five years, leading individuals to run away from equity funds. In 1995, France dropped from fourth place to fifth in the world for equity fund assets under management, with only Ecu39 billion under management.
But the institutional management market remains underdeveloped in France. While many talk of pension reform opening the door to increased opportunity, that day is still far off. Like most Continental European countries, the retirement system is based on a pay-as-you-go philosophy. There are two tiers: the government's social security system and a second public scheme, AGIRC/ARRCO. Besides their annual cash flow, French retirement schemes only have some reserves from the golden years to manage. According to a confidential survey from international consultancy InterSec Research, French retirement scheme assets total some FFr324 billion. Of this sum, 60% appear to be entrusted to external managers. And of this approximately FFr194 billion, 58% is entrusted to banks, 31% to insurance companies, and a mere 12% to independent asset managers-as little as FFr23.3 billion for the whole country.
market is emerging
French lawmakers have debated creating funded retirement systems for their employees, just as German officials are grappling with the same question. But proposed changes have been adamantly opposed by France's unions, which crippled Paris last year with a series of paralyzing strikes. And newly elected financial ministers have been more concerned of late with increasing household revenues than household savings.
Insurance general accounts-another traditional target market for institutional asset managers-remain largely untapped, with only 7% of an estimated $480 billion in insurance assets under third-party management. French life insurers, traditionally focused on liabilities management, haven't paid much attention to the investment of their accounts-and many conspicuously mix their general accounts and shareholder equity.
France's reputation as a robust market for management of open-ended funds is in jeopardy. While the amount of assets invested in open-ended vehicles worldwide jumped 64% between 1992 and 1995, it only rose 20% in France. Without reintroduction of savings incentives for the French public-or reform that creates institutional asset pools-French asset managers will need to tap foreign markets for continued growth.Gilles Pouzin