If a planned merger between the investment banking and asset management divisions of France’s Caisse d’Epargne group and the Banque Populaire mutual group goes ahead, it will create one of Europe’s largest fund managers. Ixis Asset Management, part of the Caisse d’Epargne group, has €430bn of assets under management while Natexis Asset Management, a subsidiary of Banque Populaire, runs assets worth €100bn. A merged entity, Natixis, with €530bn of asset under management would rival Crédit Agricole’s funds arm.
While consolidation invariably brings uncertainty, Veronique Leroux, Ixis Asset Management’s chief investment officer, is confident that a merger will not affect the firm’s business development strategy to 2010. That plan is to grow institutional business outside the home market by promoting the firm’s structured product, total return and quantitative investment capabilities elsewhere in continental Europe and in the UK. At present, Ixis runs a mere €860m for European investors outside France.
The firm launched a quantitative fixed income fund about a year ago – Ixis Taut Quant E – which has garnered €375m in assets under management. Buoyed by the response from institutional investors, the company plans to boost its €550m quantitatively-managed assets by launching a number of new quant strategies this year and in 2007. In fixed income, such products will include long/short credit arbitrage, in equity, a strategy which actively allocates between CPPI (Constant Proportion Portfolio Insurance), options, and synthetic variable exposures to over-leverage or de-leverage in order to create convexity and a balanced management process whereby a combined directional and absolute return fund allocates tactically between several asset classes.
“We have the capability to develop quantitative investment expertise in-house. If you are successful you will always be able to sell quant products,” says Ms Leroux.
Ixis AM is also striving to grow a collateralised debt obligations (CDOs) business started in 2000, since then it has amassed €1.3bn of assets under management in 10 CDOs including one CPPI CDO (the underlying assets are all corporate credits) and one asset-backed security fund.
The firm is currently examining several proposals from investment banks to launch different products including a CDO of corporate bonds, a CDO of ABS and a CPPI fund.
Getting the timing right
But timing is everything as Ms Leroux points out: “Current market conditions are not favourable for a CDO of corporate bonds. A spread widening would offer more opportunities. For a CDO of ABS, the arbitrage is no longer there with the European issuers; a mix of US and European issuers would make more sense. And with regard to a CPPI CDO, we believe that there is still some investors appetite for credit portfolios in a capital guaranteed structure.”
Ixis AM’s main project for 2006 is the launching of a fund that will invest in equity tranches of managed CDOs.
“CDOs are one way we can capitalise on our credit expertise,” adds Ms Leroux. “They are very popular in France and demand is rising because interest rates are so low and credit spreads are so tight.”
A new fund of hedge funds is in the pipeline but no date has been set for launch. Ixis used to manage a number of hedge funds in the past including CTAs, convertible arbitrage and global macro. The decision was taken to switch to “a less risky business model” which was to sell funds of hedge funds. But while Ixis still manages a CTA fund and an event-driven fund, it has only developed what Ms Leroux calls a fund of money market funds with “a performance booster”.
When launched, the new fund of hedge funds will contain 10 underlying strategies, namely, long/short Asian equity, long/short US credit, Asian global macro, world global macro, long/short European equity, long/short US equity, fixed income arbitrage, European event-driven, CTA, European convertible arbitrage.
Low interest rates and institutional investors’ fear that bond market risk could rise in the future are fuelling demand for total return mandates, according to Ms Leroux.
She says: “We are seeing more total return mandates being awarded, including not only hedge funds but tactical asset allocation. The difference between total return and hedge funds is becoming narrower and narrower. In the past, total return meant being invested or not invested in equities; now it means that you can go short the equity or the bond market so there is no real difference. Alternative investments such as hedge funds should be part of a total return mandate.”
Ixis manages assets worth €500m in nine total return portfolios. Total return mandates are mainly invested in bonds and equities and occasionally in currencies and commodities. For most such mandates, Ixis tends to target absolute returns of 6 per cent per annum. In a few cases, the performance target is expressed relative to Eonia or Euribor three months (for example, Euribor three months + 100 basis points).
“Based on our track record and growing demand, we expect a large increase of these portfolios, both mandates and mutual funds, in the future. That is the reason why we will be launching a total return bond mutual fund in June/July,” says Ms Leroux.
In addition, the company is seeking to grow a modest socially responsible investment (SRI) business. Ixis also manages €400m of assets in socially responsible investment mandates for French investors. An active and fundamental SRI process is based on a proprietary SRI qualitative research developed 10 years ago.
The guiding philosophy is a conviction that companies that take into account social, environmental and governance issues in their global strategy will perform better in the long term than those that neglect them. When building and managing portfolios, systematic preference is given to companies that demonstrate a constant commitment to address these issues. In turn, Ixis avoids investing in companies with no clear and identifiable approach to sustainable development issues.
“One of the main components of our approach is to establish to a disciplined scoring of the companies belonging to our investment universe on a set of criterias that enable us to identify which companies are the ‘best in class’ in the various sectors,” says Ms Leroux.
While balanced mandates are still prevalent in France, she says a shift to core-satellite asset allocation is already well-established and tactical asset allocation (TAA) is growing in popularity.
“The FRR (French pensions reserve fund) is a good example of an institutional investor trying to find the best fund manager in a given asset class. They decided to keep tactical asset allocation in-house,” observes Ms Leroux who points to a clear separation between fund selection and TAA. In the future, she predicts more demand for TAA with use of derivatives.
Ixis is one of seven asset managers running active eurozone bond mandates for the FRR. It also manages an international bond portfolio for the French fund.
Taking account
She says that IFRS accounting rules pose a potential problem for French institutional investors who might wish to uses futures or swaps.
“The problem we may have with IFRS is that when you use any type of derivative, it is marked to market in your P&L which means that it will increase the volatility of your P&L. If for example, you want to reduce your equity exposure by 100 per cent in a portfolio made of 50 per cent EuroStoxx and 50 per cent EuroMTS, you will sell 50 per cent of equity futures and these futures will be marked to market in your P&L whereas the equity portfolio will probably be available for sale and variation in price will not impact your P&L,” she explains.
IFRS also impacts on French institutional investors in dedicated funds (segregated accounts) which are classified as “trading” and not “AFS” assets for accounting purposes.
Ms Leroux says: “For the time being, none of our clients has switched from dedicated funds to open-ended funds. Some of them have decided to take the risk of having a more volatile P&L. Others may have negotiated with their auditors but this is not clear. But this is still an issue and the problem could arise if the stock market crashed.”
Ixis AM tends to win European equity mandates with an MSCI Europe benchmark and an average tracking error of 4 per cent to 5 per cent. In fixed income, the firm handles mainly passive or active European bond mandates with a tracking error of 1 per cent to 2 per cent.
Investment mandates in other asset classes such as US equity or fixed income are managed by the group’s subsidiary asset management operations in the US.
The ability to cross-sell products such as large and small-cap equity to existing clients is considered an important element of business growth. Last year French clients of Ixis AM made €760m in net subscriptions to US equity products. Although US-managed fixed income products are not being marketed directly to clients in Europe, a global bond fund managed in Paris by Ixis AM is sub-advised by Loomis Sayles.
Ms Leroux says: “When we have subsidiaries which can add value, there is no reason why we should not be able to sell the expertise to our clients. In striving to achieve our business plan up to 2010, one of the decisions was to increase cross-selling marketing activity.”
Growing institutional business in Europe is Ixis AM’s main objective in the coming years. Outside of France, Austria, Germany and Scandinavia are considered to offer the best opportunities.
“We would also like to make inroads into the UK in the next three years. We have to increase our presence there and to get more involved with the consultants,” says Ms Leroux.
To date, Ixis has received about 10 requests for proposals from the French subsidiaries of Anglo-Saxon investment consultants, including Mercer, Russell, Hewitt, Watson Wyatt & Cambridge Associates.
While claiming that CDOs should give Ixis a competitive advantage in the UK, Ms Leroux hopes also to be selling total return products in the UK within two years.
VERONIQUE LEROUX: THE MAKING OF A CIO
2005: Joins Ixis Asset Management as chief investment officer
2000-2005: Chief investment officer at SCOR, a French reinsurance company.
1995-2000: General manager at Dresdner RCM Gestion
Awarded an advanced degree in Economic Policy from Institut d’Etudes Politique in Paris.
Attends the French graduate school of management, Essec, and the French academy of statistical and actuarial studies, Ensae.
