With Ffr250 bn ($50 bn) in global assets (excluding its real estate investments), Union des Assurances de Paris, better known as UAP, is France’s number one insurance group and the country’s leading institutional investor – accounting for approximately 4 per cent of the total capitalisation of the French stock market.
Aside from its standing in its home market, UAP also ranks as the second largest insurance group in Europe and has interests in around 60 countries worldwide, including Sun Life in the UK, Royal Belge in Belgium and Colonia in Germany. The group was privatised in May 1994 in the wake of a gradual dilution of the state’s interest since 1990.
It was at the turn of the decade that the group decided to establish a separate entity dedicated to the management of unit-linked insurance funds – both for the insurance company directly and for its outside customers. The end result of that decision was the creation of UAP Gestion Financire (or UAP Asset Management) in 1991.
‘The main reasons for the move were strategic,’ explains Marcel Nicola, managing director of the asset management business. ‘It answered the internal audit requirement of separating the management of unit-linked funds from those of the internal funds of the company. And it also gave the new company the means for its own development.’
Four years later, the fund management operation has grown to the position where it manages Ffr42 bn ($8.5 bn). Around a third of these funds emanate from external clients – principally from the insurance sector – and the remainder is sourced from the management of the liabilities of the insurance company itself. Over 60 per cent of the total is invested in bonds; 28 per cent goes into global equity portfolios; and the remaining 10 per cent or so is invested in shorter-term products, exclusively in France.
‘This Ffr42 bn is broken down into 42 main funds listed under the control of the Commission des Operations de Bourse {the French equivalent of the SEC}and 60 other funds for different companies,’ says Nicola. ‘Some of these other companies are subsidiaries of UAP, others are small insurance companies, pension funds for private companies and other customer bases where we have developed our activity.’
It takes twelve Paris-based fund managers to look after the funds with the support of 20 back-office staff and three others working on the development of commercial opportunities. The growth of the latter group is a recent occurrence which has become one of the focus points of the asset management firm in the past year.
‘One of the priorities in 1995-96 is to develop the commercial side of the business, first in France and then across the rest of Europe,’ says Nicola. ‘The initial idea was to have an organisation with well-performing fund managers and then to go on and build a strong back office to provide transparency and the best possible reporting of our activities. Now we have achieved this strong base we can go out and sell ourselves,’ he explains.
Nicola goes to great lengths to stress that UAP Asset Management is a long-term investor, not least because of its need to ensure that its investment returns match the liabilities of its main client – UAP – with its investments. He maintains that this reputation as a long-term investor which gains results, combined with the firm’s experience in asset-liability matching and professional advice prior to investing, are the main attractions of the firm to its external clients.
‘We believe it’s impossible to manage assets without discussing the customer’s liabilities,’ says Nicola. ‘We always work very closely with a team of actuaries from the life department. They sit in the same office as the commercial team and are kept involved right from the beginning of the relationship with a client.’
As for the unit-linked funds chosen by private customers for life insurance, Nicola believes that an average minimum of eight years is a good match between assets and liabilities. Most French life assurance/savings contracts allow clients to choose between specialised funds and review asset allocation fairly regularly, however.
To implement this long-term investment approach, Nicola and his senior colleagues hold a monthly meeting to discuss the global economic situation and their likely top-down strategy for the next month. There are five people on the global economy committee. Aside from Marcel Nicola, the committee members are: Pierre Chevallier, who is in charge of foreign equities investment; Didier Bouvignies, in charge of French equities; and Thierry Charon, in charge of bonds. In addition, one of the fund managers from the group serves on the committee on a rotational basis.
‘We try to analyse the situation with a brainstorming session to enable us to make some forecasts,’ says Nicola. ‘We have these meetings once a month but if there is any trouble in any of the markets we could arrange a meeting in five minutes as all the people are here. We review the main markets with the aid of central bank statistics and economists’ studies in order to try and reach a consensus.’
The top-down conclusions reached by the committee are then passed on to the fund managers. But there are no strict rules for immediate implementation and, in most instances, the conclusions only form the basis of a recommended approach. It is then up to the individual managers – after applying the fund’s benchmark – to decide upon the most appropriate cause of action to take.
According to Nicola, the managers will automatically move to attempt to protect the portfolio by choosing stock which has the least risk. But, at the end of the day, if the customer holds a desire to remain invested in a country or sector against the recommendations of the global economy committee then there is nothing to stop that strategy being pursued.
Derivatives are not necessarily used by the fund managers as a means to reduce exposure. Most of the collective funds are what Nicola terms ‘pure’ to allow the investor ‘to choose a market and not our own feelings about the market,’ he says. ‘We implement our own asset allocation with the diversified funds. The size of both the ‘balanced’ and ‘offensive’ funds still allow us to invest into or pull out of a market without using derivatives.’
Monthly investment strategy meetings are scheduled one week after the global economic conclusions have been reached. All twelve managers attend the meeting at which they highlight the special characteristics of each region and market and make investment decisions accordingly, within the specification of each of the funds. Nicola points out that although both of these committees serve a definite purpose for a long-term approach they do not bind the fund managers to a top-down approach which might restrict their own decisions.
‘We have an approach which is a mix between top-down and bottom-up,’ says Nicola, putting particular emphasis on the value which he sees to be gained from working the way up the fund management learning curve. ‘We try to maintain the freedom of the managers so they are able to improve their knowledge and capacity. Weekly investment meetings take place where fund managers discuss their investment decisions with their manager.’
But despite the relative freedom of action which Nicola allows the managers, he is critical of those who try to beat the competition by veering too far away from the benchmarks set for each fund according to country and sector weightings. He believes that it is necessary to give a certain amount of leeway to managers to allow them to pick the best stocks; but he is equally clear on the fact that those who continually keep a watchful eye on the competition, rather than their own goals, are likely to fall foul of high risk.
Nicola thinks that the new breed of young managers which he sees in the nineties are more likely to maintain an overall commitment to benchmark investing – rather than trying to prove that they can beat everyone else in the market. ‘When the managers try to follow the benchmarks then I remain happy,’ he says. ‘Sure, they may veer one per cent either side but that is not a problem, as long as they have the benchmark as the final goal.’
And the choice of those benchmarks is a relatively simple task due to the fact that most of the funds at UAP Asset Management are highly specialised. The objective is therefore a straightforward combination of indices.’For the French stock market we use the SBF-120, adapting it according to the objective of the fund,’ says Nicola. ‘We encounter small problems with foreign markets. With Europe, for example, it’s difficult to know whether to use the MSCI or FT Europe.’
Research, to support UAP’s fund management business, comes from a variety of sources with a mixture of external and in-house input. Nicola says that he believes that the high level of competition among the big stockbrokers means that the majority of them are forced to put out high quality research. The scope of their output is wide and they have a corresponding level of knowledge of the companies they are covering. In the light of the availability of high quality research, he says it is not necessary to have an in-house analyst following a company: the standard of the research emanating from investment houses like UBS, Paribas, Morgan Grenfell or CCF means it would result in duplication of effort.
That being said there are nevertheless two full-time analysts on the UAP team who produce summaries of documentation and questionnaires for the managers to use when they make company visits.
‘We use mainly outside research but, as is the case in most large asset management houses, the managers are also financial analysts,’ says Nicola. ‘One of the main problems for the fund managers is being able to manage their schedules. Unfortunately, there are not enough of us to devote a lot of time to one-on-one visits, but that will change. When we do go on company visits we go to get a feel of the company and to validate the expectations that were included in the analysts’ reviews – the background information which cannot be obtained from the figures.’
At present UAP Asset Management does not use any computer modelling in its investment strategy. But that is something set to change in the future if Nicola implements his plans.
‘For the time being we don’t use a quantitative approach but base our investment decisions on the fundamentals,’ he says. ‘I think we will have to change that approach, though, because we have to continue to develop our reporting techniques for our customers.’ Nicola believes that one of the major faults of the French market is a lack of good reporting. ‘The French market has good and bad asset managers – like the British and the Americans – the difference lies in the approach to reporting and presentation,’ he says.
That difference is something which Nicola is determined to rule out at UAP Asset Management. And that is one of the main reasons why more resources have been dedicated to the back office operation: to increase transparency and decrease the likelihood of reporting mistakes occurring. ‘Maybe in the future we will increase our use of quantitative methods to aid us in that process,’ he says.
And the demands from customers are leading to changes in other areas, too, including corporate governance. Whereas proxies have either not been voted in the past, or the tick has gone in the favour of management, there is now a move at UAP to put pressure on underperforming companies. That mirrors the increasing level of awareness of both issuers and investors in the French market of corporate governance concerns over the past year.
According to Nicola the changes he envisages will involve an increased propensity for behind-the-scenes discussions with managements on contentious issues and lead to better-informed voting in the future. In this regard, Nicola was set to have a meeting with a new Paris-based proxy voting research agency fairly soon after our interview with a possible view to utilising its services.
‘The customer in general is becoming more and more aggressive, asking and wanting commentary on the performance of his portfolio,’ says Nicola. ‘And that obviously affects our attitude to our investments. I think that the time has gone when the customer might say: here’s one pound, go and do your best. Now it is more likely to be: here’s one pound, try to do your best but explain why you are not the best.’
