ETFs: The French connection

Paul Burgin looks at the nature of the French ETF market, exploring product themes, investor appetite, distribution channels and prospects for development

The marketplace: Banks and insurers dominate 

France is one of Europe’s biggest investment markets. Mutual funds, almost all of them domestically domiciled, had assets of €834bn last year, according to Cerulli Associates. 

Investors are typically cautious. Over 50% of assets under management (AUM) is in money market funds. ‘Cash plus’ funds froze solid in the crisis when underlying mortgage-backed security holdings were impossible to value. The money market sector has since been narrowly redefined, enticing investors back to the fold.

Like others in Europe, the French investment scene is dominated by domestic bancassurers. The biggest retail banks include BNP Paribas (BNPP), Société Générale, Crédit Agricole and the Caisse d’Epargne network of mutual savings banks. 

The big issue right now is consolidation. SocGen and Crédit Agricole recently merged their fund divisions, with the latter taking a majority controlling stake in the newly named Amundi. BNPP is busy digesting parts of Fortis. Even La Poste (the Post Office) is snapping up niche fund providers.

Life firms play a significant role too. There is a myriad of contributory pension schemes for different professions and a growing market for personal and workplace schemes. Tax-wrapped products also have the added advantage of built-in guarantees when euro-denominated, making them irrésistible to investors in the current climate.

Whilst access to retail networks is largely locked to outsiders, the investment scene is far from moribund. New boutique operations, constant proportion portfolio insurance (CPPI) funds, ETFs and structured products continued to launch throughout the darkest hours of the Lehman crisis.

The buyers: Cautious but willing to experiment

Investors are relatively cautious, but they are also in need of income. ‘Livret A’ savings accounts are popular but pay the lowest rates since their introduction in Napoleonic times.

Investors will experiment around the edges of their portfolios, with hedge funds, structured products and ETFs growing in popularity. ETC sales are rising, but still only represent one percent of the market by turnover.

The latest Morningstar data shows ETF assets just shy of €54bn. Institutional buyers make up 90% of the market, with asset managers the most active supporters. As in other European countries, the retail arena is underdeveloped.

Nicolas Rajner, marketing manager for Europe at ETF Securities (ETFS) said: “Money market funds account for €400bn in assets, of which passives make up €60bn. ETFs make up around €39bn of that. It is impressive that ETFs have more than half that market.”

Insurance funds are the keenest buyers, ahead of multi-managers. Fixed income and equity managers tend to see ETFs as a threat, not a tool, said Lyxor.

Institutional investors like choice, but not too much when it comes to selecting an issuer. Buy-side funds, wealth managers and private banks expect to deal with three or four ETF providers, not every player in the market, said Detlef Glow, head of ETF research at Lipper. 

The chosen few must offer a wide product range for maximum access to global, thematic and ‘ordinary bread and butter’ domestic or European equity index vehicles.

An underlying appetite for ETFs is not necessarily reflected in industry data. As elsewhere, over-the-counter (OTC) trades are hard to quantify as many go unreported. Lipper’s latest figures show Paris trailing Italy, London and Switzerland in terms of turnover.

But Glow is quick to point out that France does not look too bad in comparison when open borders are considered. “Investors from France do not need to buy in Paris. Institutionals might buy from Germany, even if they are products from French promoters,” he said.

The products: Overlap and replication

The general domestic bias of investors is reflected in the ETF products on offer. Local providers all used their own existing platforms to create ETFs, making their operations some of the most efficient around.

“There is a preference towards domestic equities and plain vanilla. Lyxor’s Eurostoxx 50 is the biggest ETF in the market,” said Ben Johnson, ETF strategist at Morningstar. Geographic equities and strategic ETFs dominate in size and turnover.

Things get a little more interesting amongst the smaller ETFs. Here investors can pick from a multitude of specialist offers: Brazil, Russia, India and China are all joined by the likes of the Turkey Titans 20, a €220m Lyxor product.

Johnson said: “As the fund size dwindles, you get more choice. Exciting products are out there, but they are typically used as a tactical tool. It is absolutely encouraging that the big theme is immediate access to any corner of the globe.”

He added products must have a clear ‘line of sight’ in that investors must be able to understand what the index represents and have look-through to its constituents.

Lipper’s Glow agrees. “There is a lot of competition and that makes the market efficient. Leadership is gathered through standard market issues,” he said.

Synthetic replication using swaps is the structure of choice in France, due to the investment banks dominating the market. The possible exception is the iShares range, which offers full replication. The issuer’s cross-listed products include familiar themes such as clean energy and water, listed in London.

Product development can move quickly. When one provider innovates, others are quick to copy to ensure their product ranges keep up with trends. Glow says db x-trackers was first to market with money market ETFs, which proved an instant success given the French love of the asset class. Others followed in hot pursuit, eventually taking share from the leader.

The distributors: Lyxor dominates

There are few surprises when it comes to who holds the market share. The French banks are the main channels for distribution. 

SocGen’s Lyxor range of 159 funds listed in Paris is equity heavy. Lyxor also has all except four of the top 20 funds by AUM, demonstrating how concentrated the market can be.

“Among the five biggest ETFs in terms of volume exchanges on the market, you will always find the Lyxor ETF on the Eurostoxx 50 and CAC 40, plus other Lyxor leveraged or short, even double short, products,” said Marlene Hassine, Lyxor ETF strategist.

Issuer concentration does not mean that overseas providers are excluded. ETFS offers the second biggest fund by AUM in the shape of the Gold Bullion Securities ETC.

Rather than trying to crack the banking channel, ETFS and other players are gaining ground as pension providers look to ETFs for passive plays. Assurance vie mandates, such as those commonly run by the likes of SEI in the UK, are being supplemented or replaced by cheap ETF trackers.

There are still challenges to overcome in the life sector, said ETFS’ Rajner. “It is not a regulatory matter, but providers want to be seen as actively managed. They say they do not currently have demand from investors, so no provider has launched an ETF-heavy portfolio. They do not see daily liquidity as a benefit as they are long term investors.”

Other routes offer more immediate opportunities. Balanced managers within institutional private banking are increasing their usage for asset allocation purposes.

Rajner also has high hopes for the growing French independent financial adviser market. The Conseiller en Gestion de Patrimoine Indépendent (CGPI) sector has flourished since France introduced an independent financial adviser regime under the Markets in Financial Instruments Directive (Mifid). “The main challenge is the same as in the UK: remuneration of advice,” added Rajner.

As most advisers work on commission and ETFs do not pay, demand via the channel is usually client-led.

The future

Paris is in a robust position right now. The market is strong, liquid and full of expertise. French banks know their home market is competitive and saturated. There are two distinct themes for development, aside adding to their ranges with new funds on different indices.

Firstly, overseas markets look attractive. The big French groups already cross-list in other European cities and are developing their distribution networks in countries such as Italy, Portugal and Spain.

Lyxor and BNPP’s EasyETF target private banks and open platforms. In Holland and Belgium where local promoters already have a hold, they are looking at partnerships with banks without their own ranges.

Demand is also picking up further abroad, said Danièle Tohmé-Adet, head of ETF and indexed funds development at BNPP Asset Management. Via BNPP and Fortis, EasyETF is already establishing operations in India, Indonesia, Malaysia and Japan. 

Every market requires an element of tailoring to each offer. Hong Kong is a good base for institutional business, but Singapore’s retail-heavy market has not lived up to expectations.

“We use our client relationship manager networks to find clients. We also get a growing number of direct requests to Paris or our local representatives from local governments and exchanges about listing products in these countries,” said Tohmé-Adet.

Europe offers a second opportunity as Ucits IV approaches. Tohmé-Adet said adding value will be key to making ETFs ‘distributable to distributors’. 

While late developers, French providers are waking up to the idea of mixing asset allocation skills and underlying ETFs in funds of ETFs. Charging for the allocation element of a mutual fund portfolio and paying out less by using ETFs could be the way to create enough to pay out commissions.

Given that France is also home to Europe’s largest number of multi-manager funds, called multi-gestion, it should be an ideal place to test the waters. “Two years ago at the Monaco Fund Forum, the ETF word was forbidden. Now they cannot wait to talk to us,” said Tohmé-Adet.