Mergers prove tough for gallic digestion

Philippe Lespinard, chief investment officer at BNP Paribas Asset Management (BNP PAM) shares many of the traits of his French compatriots. He loves a variety of obscure regional cheeses, he frequents the delicatessens of London’s South Kensington district, along with other Parisian émigrés, and favours a quantitative approach to life and investment.

But after this, the similarities begin to fade. Mr Lespinard raises a quizzical Gallic eyebrow at the “modern art” which graces today’s boardrooms, slams his “Franco-French” rivals with their jobs for the boys mentality and most tellingly of all, does not believe in keeping all assets and activities within the parent group of companies.

If you can’t do it in-house, find an external partner who will manage the money for you, is the BNP PAM philosophy. Don’t get him wrong. His eyes positively shine when he talks about last year’s launch of the internally-managed Parvest European Bond Opportunities Fund, designed to capitalise on so-called “fallen angels” – bonds of companies such as Vivendi Universal and Ericsson, whose ratings were expected to improve. More than E150m was gathered into this product in 2003, not bad considering market conditions.

“Everybody was on board with this product – my investment team, our managing directors and our distributors. It was an example of perfect co-operation across the firm. Our sales team told our distributors we could achieve a 7 per cent return, which was exceeded at the end of December. The client promise and actual results for this fund has been one of the closest yet,” Mr Lespinard adds with a wry smile.

Catching the tide

In September 2003, BNP PAM created a suite of three products to take advantage of returning flows into European equities. But soaking up the E1.5bn which flowed in last year, short duration fixed income products were the most popular.

“We had a discussion with Marc Raynaud, head of our distribution team, and for two out of the three new equity products, he gave my team the mandate,” says Mr Lespinard, revealing how products are built within BNP PAM.

“We were able to put together income and growth products with existing stock selection skills. But the third one was a value product and it was obvious we did not have value skills, as we always have a quality/growth bias in European products. There is a time when value is important, and it is a skill-set very different to growth. So Marc’s team decided to source a value product from outside, from AllianceBernstein.

“We expect to be the preferred manager, but that is not possible in all cases. If you have the product and skill, you should do it yourself, but if you don’t and clients want that solution, you need to source it out,” he says.

“For instance, we would not build a small-cap equity product out of Paris, but would rely on [US-based] Neuberger and Bermann, and the same with high yield, where T Rowe Price is our sub-adviser.”

BNP PAM’s longest alliance is with Fischer Francis Trees & Watts (FFTW), dating back to 1998, for global and US bonds. Mr Lespinard describes the link-up as a “capitalistic tie-up with a decision taken to fold some of our people into FFTW.”

Deflecting criticism

Mr Lespinard dismisses snipes from rivals that the French giant – he is responsible for E110bn of the E170bn house total – is incapable of the basic skills of managing European equities.

“This is not a core product we are talking about, it is a compliment to our skill-set. External gossip is a reflection of what goes on everywhere,” says Mr Lespinard. “Banks no longer have qualms about promoting products from an outside fund firm. A diversified product range is being pursued everywhere, through a strategy of open architecture.”

Everywhere, it seems, apart from the BNP Paribas retail branch network. While white-labelled funds are sold here, a selection of external funds is not.

“Our branch network is not like every other distributor,” claims Mr Lespinard. “They are very brand aware and there is a lot of equity in our brand name. Our retail clients would be very surprised at this stage to be confronted with full open architecture, and they would need guidance to select the funds. If you are looking for advice, how do you or the person in charge of your account make judgements that a small-cap value fund is better than a growth fund? That explains why choices are made ahead of time on behalf of that client.”

It is no secret that BNP PAM wants a greater capacity to manage US equities in-house, and it continues to look to buy a stake in an external firm.

Mr Lespinard adds: “We approached two firms over the last 18 months and could not agree a common position. There are many examples of costly acquisitions in this business, but the internal discipline we have about how we spend our money has prevented us from making mistakes.

“Our own performance in US equities has been exceptional over the last year as a speciality manager and strong over three and five years. That may just be enough for us.” European equity performance, however – see table right – has lagged behind the index.

Besides, Mr Lespinard sees mergers – even well managed ones – as disruptive, with profit often taking a back-seat to a quest for size and influence.

Referring to the recent merger between Crédit Agricole and Credit Lyonnais, in which BNP Paribas was also considered as a suitor for the latter bank, he comments: “The BNP and Paribas merger is a couple of years behind us now in asset management terms, but it still lives in the minds of some of our clients, despite this. No-one in BNP PAM was really keen to get into a merger situation again so quickly, not having digested the previous one.”

‘Americans eating us for lunch’

Even against the background of an uneasy political atmosphere between European governments and the US, Mr Lespinard believes American fund houses have continued to seize market share from continental distributors, even in European asset classes.

“I have a lot of respect for our US competitors for several reasons,” he says. “They bring a dimension of professionalism to the job that is not always evident in European firms. Second, in terms of fund flows, some leading US firms have emerged successfully challenging local players. We have to leave politics to the politicians and business to the business people. If the Americans are able to eat the Europeans’ lunch on their ground, the Europeans will need to do better. Clients will not respect us for seeking protection from Brussels or elsewhere.”

Although he pronounces himself “stunned” at the extent of market timing and late trading scandals, he believes it is too early to tell whether this will be seen as an American or European problem.

BNP PAM has already been asked by distributors and clients about how it has handled the issue. “We’re already affected, even though I am confident we have nothing to hide,” believes Mr Lespinard.

“Our sales arm is going through all the transfer agent records, and alerting portfolio managers of any transactions they need to be aware of,” reveals Mr Lespinard. “We are not aware that we have an issue at the moment. So we are ahead of our competitors, but this wasn’t the sort of business argument I want to be using. If business is corrupt, it will taint all of us. I don’t see it as an American issue, but a broader confidence issue in capital markets.”

With investors needing to pump $100m into a mutual fund to make $2m in a day from sharp practices, he suspects either collusion within fund companies, or that “somebody must have blinkers on.”

“I can’t think of a fund manager who would not register such huge amounts being sneaked in and out of a mutual fund. I can’t imagine a set-up where this would not be reported to the chief investment officer. If you had a strong culture of putting clients’ interests first, I cannot conceive that a dissenting voice did not go to the compliance officer and alert him to it.”