Brexit provides Paris with new lease of life

Paris is not just a financial centre where products are manufactured by 640 asset managers, including the likes of BNP Paribas Investment Patners, Amundi and Banque Postale Asset Management as well as 400 smaller, entrepreneurial boutiques, but increasingly a hub for selecting funds for global distribution. 

Three key names of SocGen subsidiary Lyxor, BNP Paribas fund selection unit Fundquest and ABN Amro’s third party fund pickers are all based in the French capital and their role is increasingly global.

“We have three global players now in Paris,” says David Benmussa, head of third party distribution at funds house Amundi, which manages more than €1tn ($1.13tn) in assets. “As a fund selection centre, Paris would definitely rival London and Zurich.”

But French fund houses are having a tough time, because their traditional specialities in equity and fixed income are not enjoying their best sales period, as customers fear market volatility and central bank control of economies. Many of their clients are shifting huge chunks of their portfolios into low-yielding or loss-making cash funds and demanding alternative assets such as real estate and private equity, forcing old-school fund houses to develop new skills.

“Something I have never seen previously in my career is the level of cash equivalent held in private bank portfolios and multi-management,” states Mr Benmussa. “Five or six major clients have told me they are holding between 20 and 40 per cent in cash positions.”

Amundi is France’s leading money market player, with €150bn in this asset class, including €7bn of inflows in the first quarter of 2016. “It is better to be in a good money market fund, even if performance is slightly negative, than to be billed 40 basis points, which is the going rate at banks [and securities services providers] for holding cash,” he adds.

French fund houses are currently developing products to match demand for commercial property, with Amundi’s Opcimmo unit-linked fund now hitting the €3bn mark, posting net returns of 4.5 per cent in 2015. Mr Benmussa points out that half of French fund sales are currently flowing into real estate funds. Fund houses are also continuing to outsource management of high alpha funds to specialist US managers and develop long-short Ucits products to boost alternative returns.

One of the key beneficiaries of these trends is La Française, an asset manager launched by former Invesco distribution boss Patrick Rivière in 2000 and now boasting 530 staff and €53bn in assets under management, predominantly in real estate and money market funds, having recently moved into a more spacious headquarters in the Montparnasse district, close to the Amundi offices. La Française, has also been busy spreading its wings internationally, with offices in Frankfurt, Luxembourg, London, Madrid, Milan, Hong Kong, Korea and Singapore.

“Real estate is our main area of expertise and has been the natural solution for the last two years from retail and institutional clients,” says Mr Rivière. “It is perceived by clients as a safe investment space. Since the beginning of the year, we have faced very volatile markets in all asset classes including equity and credit. Clients face a difficult decision on how to invest and real estate is becoming an even higher priority for them than last year.”

Many, he says, see Europe as caught in the same type of negative interest rate trap that plagued Japan in previous decades, with real estate remaining one of the sole safe havens, provided there is no economic collapse.

But clients need to be educated about the challenges which real estate investment poses, this being a long-term investment, based on time taken to negotiate a price, buy a building and find tenants. 

“People need to understand that it’s complicated to get in and it’s complicated to leave,” says Mr Rivière. “If too many people are chasing real estate with a short-term view, there are difficulties when they want redemptions. We need to be very precise about liquidity and make clients conscious of that. There may be good returns, but there is no way to make real estate a liquid asset. There is a stability of return, but if the asset were liquid, it would go up and down like all the rest.”

Up to 65 per cent of his French investments are in Paris, while German investments are spread across seven different cities, including Munich, Frankfurt, Hamburg and Dusseldorf.

Despite these excellent local opportunities for asset managers with “on-the-ground” expert investment teams, Mr Rivière believes the French government has not always been supportive of financial services, with the industry having to resist “a quite unfriendly government approach at the beginning of the Hollande tenure”. This is despite the fact that the firm’s main tenant of its €10bn real estate book has been government departments.

But the last two years have seen more positive product and tax initiatives under the stewardship of finance minister Emmanuel Macron, a former Rothschild banker. “For the first time in our lives, the finance minister is coming from the business, from an investment bank, bringing a lot of understanding and positivity to the business,” says Mr Rivière. “The government realises they can create jobs and as a financial centre, we have probably seen the worst.” 

Many in the French investment industry believe Paris is only waking up to the opportunities for expansion due to the UK’s Brexit referendum. 

“Compared to the rest of Europe, Paris is the only place where there is expertise, size, proximity and a financial culture,” he says. There has even been talk of designing a special “comeback package” for the 400,000 French citizens currently working in the UK, many in financial services.

“People have been moving out of France to London or Belgium as soon as they become rich,” he says. “The atmosphere has been negative for entrepreneurs. People are now creating projects outside of France, which is very negative and needs to be a priority for the next government to tackle. Both entrepreneurs and financiers have been described as ‘the enemy’, which has had a negative impact. We need more communication with entrepreneurs, but people need to perceive it will last and is not just a one-off.”

Mr Rivière expects the French financial model, where  headquarters of banks and asset managers  are concentrated in the concrete and glass La Défense district to the north-west of Paris, to change.

“The La Défense concept is a bit of an ageing one. Now there is more of a trend for the front office and HQ to move back into the centre of Paris, with the back office moving further out. The SocGen concept of everybody gathered in two towers is no longer today’s idea, it is a model of the past.”

PROUD TRADITION

Many French financiers believe their country’s traditional financial prowess is somewhat under-exploited. “Paris has always had a tradition for managing money, more so than most continental European cities, due to the large presence of institutions who require active management of their balance sheets,” says Géraud Dambrine, who runs international institutional distribution for Lombard Odier Investment Management. He points to two institutions next door to each other in Montparnasse, the CNP and Credit Agricole Assurance, who have Ä700n of assets between them, which can be outsourced to external managers. “People talk about Abu Dhabi as a financial hub, but Paris is right up there, particularly due to these huge insurance companies,” says Mr Dambrine.

Although there is very little strategy to promote Paris as a financial centre, the industry has appointed Didier Le Ménestrel as chairman of La Financière de  l’Echiquier to co-ordinate the project. “Our motto is come to Paris, it’s better than going to Luxembourg,” he says with just a hint of mischief, admitting that it is the Brexit debate which awoke French fund houses from their slumber. 

“Since the crisis, Paris has lost market share in the funds industry, not in the ability to manage funds, but in the location of funds,” he laments. “Mr Hollande was elected on the basis that finance is the enemy, that he would tax every €1m salary at 75 per cent, which should remind English people about Harold Wilson,” he says. “He has been sticking to that manifesto and this is how foreign investors see Paris, through a sense of unstable taxes and dislike of finance.”

But the finance industry is still a relatively new one in continental Europe, with citizens and governments not yet sure how to accommodate it, believes Mr Le Ménestrel. “There is a bad habit in Europe of destroying any savings every 40 or 50 years with a major war or revolution.  That culture in Europe is a very recent one, compared to the Anglo-Saxon and US skill of managing money, which has existed for centuries. We will come to that kind of understanding in future generations and finance will be an important part of our industry in France.”