SGAM’S COLLAS LOOKS EAST FOR FASTEST GROWTH

Philippe Collas, the silver fox of French finance, is in a slightly subdued mood, as he holds court over a lobster lunch in his company’s custom-built Parisian headquarters. The food may still be cooked to meticulous standards – this is France after all – but the wine is not flowing like it did when Société Générale could do no wrong. And there are nervous clients to be seen in the afternoon. One of the problems for Mr Collas, who as head of SocGen’s Global Investment Management and Services (Gims) division is responsible for the SGAM asset management franchise, the global private banking operation and the securities services business, has been those pesky structured finance products. CDOs, including the popular ‘Westways’ line, have led to $65m of losses from institutional investors. According to Gims, there are no questions over the products’ management. After all, they were not invested in dangerous sub-prime debt. In fact, quite the opposite, they were exploiting opportunities in mortgage-backed securities issued by respected US bodies such as Fannie Mae, Ginnie Mae and Freddie Mac. They performed as they should have done in particularly problematic markets. They had been highlighted in the good days, when apparently structured finance teams could do no wrong. They were described as making significant contributions to the bottom line, and responsible for 44 per cent of the SGAM group’s net inflows of ?34bn in 2006. Today, Mr Collas is clearly aware of reputational risk to his TCW brand, but diminishes the importance of CDOs to the bottom line as “low margin products”. What is perhaps more concerning is money market funds – not the standard liquidity fund – but the dynamic, money-plus version favoured by French investors and poised to be rolled out across Europe. These funds have failed to beat their benchmarks, and SGAM, which boasts a 10 per cent market share, experienced a ?6bn run on these funds during eight weeks in the ill-starred summer of 2007. Mr Collas is not one to sit there and let the gloom descend. He knows the fallout of the market storm will blow over, just as it did after the far worse 1987 Crash, when he was running SocGen’s capital markets division in London. Yet he needs to polish his cleverly devised distribution strategies both at home and abroad. It seems at the moment, that the further away from home they are, the more successful are the SGAM sales initiatives. China has been important for SGAM, with a deal signed with a corporate Baosteel. This is in complete contrast to many competitors who have signed distribution deals with a single bank. As Mr Collas explains, his craftily worked plan means he gets two banks for the price of one, as the joint venture gives him access to customers of both the China Construction Bank and Bank of China. This gives SGAM a potential 200m Chinese clients. SocGen has a 20 per cent stake in Rosbank, Russia’s largest non-state bank. Mr Collas has recently returned from Russia’s Central Bank in Moscow, where he exercised the group’s option to increase its stake above 30 per cent. “I will be visiting Rosbank next month to set up an asset management company in Russia,” confirms Mr Collas. “We will have people on the ground. We had $7bn net inflows in the first eight months of the year in Asia excluding Japan. When we have a business in Russia, there will be a very strong cow for us to milk.” CZECH mate SGAM is also active in the Czech Republic where its parent company owns Komercni Banka (KB), acquired in 2001, the same year when the group acquisition policy led to the buy-up of the CDO specialist TCW in the US. “SGAM is in Prague, discussing with the bank’s distribution people ways to find the best products for the network, in equity, bonds, balanced and guaranteed products. We are one of few foreigners managing money in the Czech Republic,” says Mr Collas. “What we have done with KB, we will replicate in other East European countries such as Romania, where we are strong through our BRD subsidiary, and are taking our asset management company forward very carefully in line with market development.” Mr Collas has used this “create the product and wait for the market” strategy before, so it is tried and tested. He created the hedge funds business, SGAM Alternative Investments, which now runs ?74bn, from a standing start in 1998. Things were initially slow, but Mr Collas had correctly predicted that equity and bond business would not prove so interesting after the turn of the millennium, and that alternatives would soon become ‘de rigueur’ in both private client and institutional portfolios. Despite talk of rivalry with the SG Corporate & Investment Banking arm, whose Lyxor unit runs similar numbers in synthetic alternatives strategies, Mr Collas insists the two run complementary businesses. “If we were able to go down this path [of growth] in the last few years, it is because there has been no competition between the organisations,” says Mr Collas, the old twinkle returning to his eye. “There is a strong distinction to what should be done by Lyxor and what can be done by SGAM AI. We are not competing at all, but working closely, covering everything. In fact there is not a single hole in our coverage, both in alternatives and structured products.” While some colleagues have previously blamed competition from Lyxor for SGAM’s lack of penetration of the Société Générale retail banking network, Mr Collas plays down any internal enmities. “The business is well defined, for Lyxor and for us. The network is working in the best interest of its clients. They are going to Lyxor for some funds, such as structured products on index funds. Some market conditions are better for index products than active managed products, so the network sold Lyxor products for two or three years. “But at the end of 2006, there was a feeling that the equity market would go ahead, so the network came back with active structured products and we were their main provider. The network is not giving advantage to SGAM AI or Lyxor. They have to create the product which best fits their needs.” Mr Collas acknowledges there is a broader question here, about the very nature of SGAM as a funds provider. One consultant and observer of SGAM says there will always be an inherent conflict of interests within the company, set up to sell expensive products for its banking clients. “They are almost obliged to stuff customers with their own products at high margins,” says the consultant, suggesting that external initiatives, “such as white labelling in China,” merely amount to “experimenting” and go against the group’s raison d’etre. Pressure to open up As a “special adviser” to SocGen’s retail banking network, Mr Collas was instrumental in convincing bankers to start opening up their product range to external managers. “Maybe the top fringe of clientele was familiar in working with external managers, but the rest experienced no pressure coming from the sales people to do this,” says Mr Collas, exploding the widely-held myth that there is pressure from mass affluent or retail clients for an open architecture approach. “We told them they had to open up because it was the way the overall retail banking industry was going and it was important to be part of this move. We had been working with our private banking unit for some years in this way.” Mr Collas struck a joint venture with the Russell group in 1997, to choose external managers for SGAM and around ?7bn is now managed under this arrangement. These products are heavily sold through Crédit du Nord, a regional banking network owned by SocGen. “Crédit du Nord started distributing Russell products five years ago. They did not have a strong enough brand in the asset management market, so it is better for them to sell outside products,” adds Mr Collas. The approach for the Société Générale network is very different, as SGAM enjoys a strong brand, he believes, with SGAM funds easier to sell than external products. “We had to teach them that it’s a good idea to sell external products and they did, mainly through multi-manager systems. It is very difficult for the network to sell piece by piece, products from external managers, such as Fidelity for equities or Pimco for bonds. They would not know when the clients bought the funds or when they need to sell.” SocGen’s private banking arm, which also reports to Mr Collas, running ?80bn, has long had a strong commitment to using third-party fund managers and recently acquired ABN Amro’s UK private banking arm. “The acquisition was made because they were doing the same business as us and had a strong presence with the same philosophy,” says Mr Collas. “Plus we were buying out a competitor, which is always attractive. We hope others will follow and are looking carefully.” But those familiar with Mr Collas know that when the fox announces that he is looking for prey, it means his gaze is really turned in another direction.