Going for goal with alternative classic combo

Alain Clot, chief executive officer of Société Générale Asset Management (SGAM), the ?355bn funds arm of its French retail and investment banking parent group, still plays football regularly, even though he has turned 50. “When you are the size that I am, you just have to play a little bit dirty,” smiles the short, yet stocky, Mr Clot. But his observation certainly does not apply to his group’s business dealings. With 2,750 staff and agreements with 800, predominantly banking distributors, there is no shortage of critical mass. Regulatory burdens “In asset management, I don’t know yet what’s won, but I know what’s lost, as entry barriers are so large,” says Mr Clot, referring to regulatory and compliance burdens such as the European MiFID directive, which may put smaller groups up for sale, or lead them to withdraw from certain investment strategies. “We already know who has an entry ticket. And somebody not in the game today will struggle to reach the final.” One area in which SGAM bought an early ticket – and the product sector the group seems most proud of – is alternatives, including hedge funds, private equity, property and structured products. SGAM was quietly making inroads into this sphere in the late-1990s, with the launch of SGAM Alternative Investments (SGAM AI), which now runs the lion’s share of the group’s e60bn investments in alternative strategies. The sharp bet by Mr Clot, and his boss Philippe Collas, responsible for all of SocGen’s asset gathering activities, was that in the early days of the new millennium, few distributors would be interested in traditional equity and bond products. Although money has flowed into alternatives from institutions, a newer strategy of giving investors access to long-only equity strategies managed by alternatives players Renaissance, Caxton and Highbridge, will give distributors the comfort of selling hedge fund-type vehicles under mutual fund structures, now permitted by Europe’s Ucits III regulations. This convergence between long-only and hedge funds will also allow the use of high-powered institutional techniques in the distribution arena. “This will increase our offer,” says Mr Clot confidently. “This strategy is right in the middle, between the alternative and classic approach. Classic fund management, using leverage, is moving into exactly the same space as alternatives.” But to successfully manage alternative products, believes Mr Clot, SGAM must maintain a boutique atmosphere within the large-scale organisation. “Investors want to be sure that the risk management of a big company can be applied to a small number of people applying a hedge fund strategy,” he confirms. “You need to be a boutique in culture, but with the risk-management standards of a multi-national organisation. That’s why there are so many boutiques out there for sale.” Although star managers in a boutique employing 10 to 20 personnel command much higher salaries than they would somewhere like SGAM, this is compensation for the claustrophobic lack of movement and career progression they may face, believes Mr Clot. “You need to pay them more in a boutique than in a firm managing 3,000 people, as you can’t offer them a long-term career path.” Asian expansion These career opportunities within SGAM centre mainly on the fast-expanding operation in Asia, where SGAM employs more than 600 staff, responsible for bringing in ?25bn of assets over the last six years. In fact, the majority of staff on the payroll are stationed away from the Paris head office. “We have a very big presence in Japan, Singapore, India, Korea and mainland China, where we work with local lenders and distributors,” says Mr Clot, giving examples of many joint ventures he has set up. A deal with the State Bank of India, that country’s dominant distributor, gives SGAM potential access to a 30 per cent market share of a one billion plus population. “There is only one bank like that,” says Mr Clot. “They had everybody on their back, but they chose SGAM, as they wanted a long-term strategic partnership.” The jvs are also attractive to distributors, because they provide a special emphasis on capital market-led structured products and other alternatives, believes Mr Clot. “This means the same investment strategy can be issued to clients in two hours or 30 minutes. That is the beauty of capital markets,” says Mr Clot. “A mutual fund investing in the same market ideas might take six months to launch.” China – where SGAM has distribution agreements with the two largest banks, Bank of China and China Construction Bank – has also been a huge success story. A joint venture with Baosteel called Fortune SGAM has raised $3.5bn (e2.7bn) since creation in 2002. Growth potential Similarly in Europe, the markets with the strongest growth potential for SGAM, and the ones Mr Clot enjoys talking about most are the emerging economies in the Continent’s Central and Eastern regions. SocGen has been in battle with Parisian rival BNP Paribas, as well as Italian competitors, to acquire banks in Eastern Europe, and managed to buy Komercni Banka in the Czech Republic in 2001. SGAM has managed to offload ?1bn in equity products through this new distribution network. Similarly, SocGen acquired Russia’s Rosbank, the country’s second largest bank in private hands. “It’s a jewel with a presence all over Russia, from Moscow to Vladivistok, with huge distribution potential,” enthuses Mr Clot. The “new frontier” for asset management opportunities runs through Ukraine, the Baltics, Russia and Central Asia, according to Mr Clot. The US, where SGAM bought TCW, the country’s third largest independent funds house and wealth management wrap account specialist in 2001, almost looks after itself. TCW runs $110bn, but is one of those units where SGAM management does not intrude, leaving the 640 staff to get on with it. “We paid a lot of money, but sent almost nobody there – just one gentleman who is number four in the company, an ambassador at large, to kill any teething troubles between our two companies,” says Mr Clot. “Every rich American with $5m has some TCW strategies in his portfolio.” SGAM has not, however, always enjoyed the same success on its doorstep. While German progress has been excellent and staff are keen to meet Mr Clot’s “aggressive targets”, internal sources admit brand penetration in Western Europe is still not as strong as they would like. In Asia, where it has been an early entrant, SGAM has invested significantly into strategic partnerships with leading distributors, who do not have their own asset management arms. In “old Europe” however, where SGAM has partnerships with Credit Suisse, UBS and Merrill Lynch, it is fighting against the fund management arms of all of these banks for shelf space. In its home market, SGAM is improving its private banking penetration, with wealth advisory mandates from rival French banks. But there have been problems even in making the most of SocGen’s own banking network. The irony is that 15 years ago, 80 per cent of assets were managed for internal, SocGen clients. Today, with the emphasis on external flows, which is central to the company’s business model, internal channels have been allowed to get a little rusty. The internal network accounts for less than 5 per cent of fund flows, states Mr Clot. This is totally contrary to the “captive manager” claim made by competitors jealous of SGAM’s fund flows, which can amount to more than ?40bn annually, split between retail and institutional sources, but with much higher profit margins from retail money. One of the reasons for low penetration of internal channels is intense competition from Lyxor, a passive asset management company recently set up by SocGen’s corporate and investment banking arm, and contributing a huge chunk of group profits. “Lyxor has a large position of products sold within the internal SG network, and we are now in competition with Lyxor, so we have no captive client potential at all,” says Mr Clot. “That is one of the main differences with the likes of BNP Paribas, Crédit Agricole and Deutsche. We need to convince external customers to live. Most French institutions are dealing to a much greater extent with internal customers, and don’t want to communicate their proportion of business they get from these channels.” Distributor feedback Nevertheless, SGAM has re-designed its internal offer for customers in the SG network. “We tend to think that the bulk of our business is in long-term schemes, linked to retirement, and this is the basis of our new offer, with asset allocation the key,” says Mr Clot, who also takes the gamble of not canvassing any retail customers directly, but letting the distributors give feedback on which products are needed. “We are talking about flexible schemes, which evolve over the life of the customer. We have been a very substantial authority in France on mandates for high-net-worth individuals, and we are working on the ability to take this down to the mass market, and offer such a mandate to less wealthy people.” And you wouldn’t bet against Mr Clot’s vision of the future of this DC-style semi-pension business, which he believes will take off in France, the UK and other West European nations with ageing populations. After all, he was right on the money with hedge funds and Asia.