While the acquisition would have given BNP PAM a much sought-after presence in the UK and a boost to assets under management, the firm believes that through its affiliate companies, Fischer Francis Trees and Watts (FFTW), Fauchier Partners and Overlay Asset Management (OAM) it is already armed with a wide enough range of investment strategies to mount a profitable assault on the UK institutional market.
Fearful of losing money in a market that is difficult for newcomers to penetrate, BNP PAM has preferred to wait until it can enter the UK through acquisition or partnership. Meanwhile, the firm is still actively on the look-out to acquire a UK bond business.
Philippe Lespinard chief investment officer, observes: “The UK is well served with incumbent managers, some of whom are very good. So for us to come in with a couple of specialty products which are not our core activity is a tough proposition.”
Pointing out that BNP PAM’s strategy “is all about finding the right product”, he claims: “We have a decent track record in Pan- European equities and particularly mid-cap equities. We offer niche global fixed income products such as global inflation-linked and global credit in addition to the fixed income products of FFTW. But our sterling product line is very weak. To achieve scale in terms of assets and clients we need a local partner.”
For the time being, the firm will concentrate on promoting OAM’s currency overlay strategy, Fauchier Partners funds of hedge funds and FFTW’s global fixed income product both to investment consultants and directly to 20 of the top pension funds in the UK.
Recently, BNP PAM made 60 of its Luxembourg-based Parvest funds, which have institutional share classes, available to UK investors following the relaxation of registration laws for offshore funds.
Besides its desire to establish a UK presence, BNP PAM wants to boost its range of US equity products and to that end, has been on the look-out to acquire a specialist US equities house for the last three years. Such a deal is moving closer to fruition and BNP PAM hopes to buy a US specialist equity manager before the end of the year.
Mr Lespinard says: “We are looking for products we cannot manufacture ourselves that will complement our own offerings. Such products might include small and mid cap equities, value equities, an enhanced index strategy and possibly a long-short hedge fund and other single hedge strategies.”
US equity offerings
In particular, the firm wants to target the French, UK and other institutional markets with new specialist US equity products.
BNP PAM also plans to introduce new high margin specialist fixed income products such as high yield, emerging market debt and distressed securities. A newly-created fixed income credit team in Paris is due to roll out a number of investment grade and high yield products towards the end of the year.
Where specific investment expertise is currently lacking, assets are outsourced to specialist houses. The management of €1bn in small cap equities has been sub-contracted to Neuberger and Bermann. A Luxembourg-based US large cap equity fund is outsourced to Pzena Investment Management, €40m in fixed income to Lincoln Capital and €200m in Japanese equities to Sumitomo. Global and US bonds are managed by FFTW, in which BNP Paribas bought a majority stake in 1998.
Mr Lespinard says he is very satisfied with existing outsourcing partners and does not envisage bringing mandates in-house if and when the firm buy a specialist manager.
“But obviously,” he adds. “If we can acquire or strike a joint venture with an asset manager, then there is no reason why they wouldn’t be the preferred provider [for new mandates], instead of outsourcing to a third-party.”
Around 50 per cent of BNP PAM’s €200bn of total assets under management are accounted for by its home market of France.
According to Mr Lespinard, French institutional investors while still more risk averse than their UK or Dutch counterparts, are increasingly looking for alternatives to the traditional large cap equity products benchmarked to the MSCI or FTSE indexes.
“Income and growth strategies which offer a coupon payment are popular as are mid- and small-cap equity strategies,” he says.
Thirty per cent of BNP PAM’s assets are in the rest of Europe with the majority in Italy and Spain. The remaining 20 per cent is sourced from the rest of the world.
Outside of Europe, the fastest growing markets for BNP PAM are in Asia. The firm manages €12bn of assets in the so-called “new markets” of Argentina, Brazil, Morocco, China and Korea, with the latter two countries accounting for more than 50 per cent of the total.
The firm entered China in 2003 by buying a 33 per cent stake in Shanghai-based Shenyin & Wanguo Securities. The joint venture is currently selling two funds - the Shengli Prime Selection Fund (a sector-driven and stock-selection equity fund with high exposure to A shares) and the Shengli Enhanced Allocation Fund (an income-driven and risk-controlled fund which seeks to outperform the one-year time deposit rate and inflation).
BNP PAM has also set its sights on Turkey and is currently negotiating a partnership with the IRFS (International Retail and Financial Services) business unit of BNP Paribas which bought TEB Bank in January. TEB Bank owns 100 per cent of TEB Asset Management which mostly serves the retail needs of its parent company. A partnership agreement should be signed by the end of the year.
India and Russia are also on the radar with joint ventures with local banks or financial services companies being the favoured avenue of entry to these markets.
In India, BNP PAM is planning to promote money market funds and fixed income funds to institutional investors and higher margin equity products to retail investors.
Entering the Russian market is a longer-term goal. “It is a bit problematic because most of the institutional money is offshore and the domestic savings industry is in its infancy because a large number of people cannot afford to save,” notes Mr Lespinard.
BNP PAM, which already manages €800m of assets in single or global emerging countries in its Parvest funds, plans to launch a Bric (Brazil, Russia, India, China) investment fund early next year.
In terms of product penetration, Mr Lespinard says currency overlay mandates and global equity strategies are selling well in Australia and New Zealand, while in Hong Kong and the Middle East, FFTW’s fixed income products have been successful with central banks and other large institutional investors.
Multi-manager merger
BNP PAM is also bidding to grow a multi-manager business which was recently boosted by the acquisition of FundQuest, a US-based provider of web-based managed accounts with $10bn (€8.3bn) in management and administration.
In Europe, FundQuest was merged with CFM, a specialist wholesale third-party fund selection, distribution and advisory house, which was then spun off last year by BNP PAM as an independent subsidiary to vet non-core, externally sourced strategies and market them to clients.
With €25bn of assets under management and administration, the combined entity, known as FundQuest Europe, is integral to BNP PAM’s multi-manager offering.
Mr Lespinard is confident of capitalising on the increasing use of multi-manager portfolios by medium-sized institutional investors pursuing a core-satellite asset allocation model.
He believes that investors want flexibility from a multi-manager platform with access to funds of mandates, funds of funds and white-labelled products.
“Alternatively, we can offer fund distributors a platform which enables them to do multi-management themselves. We can give them a whole tool-kit, including manager research and advice. We think there is a huge demand for such a service,” he adds. Mr Lespinard is also bullish about Fauchier Partners’ prospects for achieving significant growth in hedge fund assets. Fauchier currently runs $4bn (€3.35bn) mainly for foundations, endowments and high net worth individuals but is targeting an increase to $10bn (€8.37bn) over the next five years in the institutional arena.
“We think the institutional move into hedge funds has only started,” he says. “If you look at investors with long liabilities, such as US endowments, they put between 10 per cent and 25 per cent into alternatives. The European share of the hedge fund market is only a fraction of that, so there is no reason to think that European institutions with long investment horizons will invest less than 12 per cent. At the moment, the investment level is less than 3 per cent.”
While acknowledging that certain hedge fund strategies have been over-subscribed and that some returns tend to be cyclical, he claims that Fauchier is able to find capacity with good hedge funds that are not yet closed to new investment.
He adds: “Active allocation between hedge fund strategies is another important element in achieving returns. Some strategies have done poorly and some have done well. The ability to know when you should be, say, global macro versus convertible arbitrage is clearly a value-added position.”
PHILIPPE LESPINARD: THE MAKING OF A CIO
Holds an MSc in applied mathematics and a PhD in artificial intelligence from the University of Grenoble, France
1985: Joins the World Bank in Washington DC as an investment officer
1996: Becomes a portfolio manager and a partner at Fischer Francis Trees and Watts in London
1998: Hired as head of investments for Europe at Citigroup Asset Management in London. Also co-heads fixed income investments worldwide
2002: Joins BNP Paribas Asset Management as chief investment officer
