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Performance - November 16, 2005

Interview with Frédéric Picard, Managing Director of EuroPerformance

Following the recent launch of the EuroPerformance-Edhec Alpha League Table, the first asset management firm rankings in Europe that are based on an accurate measure of alpha, Frédéric Picard, Managing Director of EuroPerformance, discusses the role of alpha in financial markets and rating agencies’ methods for classifying and ranking fund managers.

Frédéric Picard

Since the advent of hedge funds on the market, there has been a lot of talk about alpha in the asset management industry. But is alpha a concept that provides structure to the market today?

Frédéric Picard: Beyond the general marketing pitch where everybody produces alpha and seeks to differentiate their offering from benchmarked investment, asset management companies are faced with competition from index management and alternative investments, which have made alpha their main marketing argument. In this context, a great deal of reorganising is going on, like for example the recent restructuring of the Crédit Agricole group’s equity management teams according to a “core-satellite” approach. This major asset management institution is developing small teams that are specialised by investment zone and by style, with a large amount of investing freedom and the objective of producing outperformance.

How are French managers reacting to the EuroPerformance-Edhec ratings, which were launched almost a year ago?

Frédéric Picard: The Style Ratings that we launched with EDHEC in November 2004 have been very well received by asset management professionals, who appreciate our theoretical and technical approach, which allows performance to be evaluated by genuinely taking into account the risks taken by the fund. We now have to continue our work on communicating and disseminating the Style Ratings to asset management companies, institutional investors and the press. It’s a matter of time, but the first results are already perceptible, with our ratings being used by certain funds in their financial communication, by newspapers in their financial listings and recently by online brokers on their websites.

Going beyond France, what is EuroPerformance’s international strategy?

Frédéric Picard: EuroPerformance has been present in Switzerland for two years and distributes its data and products in Spain, and in the Benelux countries through our parent company Fininfo. Our referential database covers the whole of Europe and we are working on qualifying it in order to be able to offer our clients value-added services beyond the mere provision of NAV flows. Our complementarities with Fininfo make us the only European player who can propose a complete and consistent “back to front” offering to asset management players. Through our partnership with EDHEC, we are adding a supplementary dimension in analysing funds and investment management.

You have been supporting EDHEC’s research for a number of years and you have been working operationally with them for a year in implementing the EuroPerformance-EDHEC Style Ratings. What is your assessment of the partnership at this stage?

Frédéric Picard: We have every reason to be delighted with the partnership. The first results are tangible with the development of the Style Ratings and new service offerings like Style Analytics, which we have been able to develop using the methodological contributions from the EDHEC-RISK research centre. EDHEC provides us with both knowledge and their monitoring of research in risk and performance measurement. We apply these techniques to business and distribute them to the asset management professions, as we have done with the measurement of funds’ alpha.

The research paper ‘Rating the Ratings’ highlighted problems with the rating agencies’ classifications?

Frédéric Picard: My answer would be that the study highlighted problems with our competitors. In addition, since their rating systems are totally linked to their classifications, this means that both their ratings and their rankings are unreliable. Our competitors’ mistake is in wanting to make the classification a universal fund comparison, ranking and rating tool. This leads them to create very detailed classifications. They integrate numerous notions that the agencies cannot really verify over time. This in turn leads to them having large-cap categories with funds that are more than 70% exposed to small-cap risks!

What’s EuroPerformance’s solution?

Frédéric Picard: EuroPerformance has developed a hierarchical classification that only integrates objective elements described in the prospectus. Each week, a classification committee examines not only the new funds but also the funds that have changed management. Nonetheless, errors are always possible and we are in regular contact with the asset management companies in order to review their range of funds. This is the case especially for the awards that we organise with the financial press.

And on the rating level?

Frédéric Picard: The ratings are separate from the classification. We use a multifactor approach based on style indices to evaluate the fund’s true benchmark. The average of a category in the classification is not the right benchmark for the risks taken by all the funds in the category unless one believes that all the funds are identical and pursue the same management objectives. That is why one must get away from the classifications, which are a key to understanding the market, but insufficient for evaluating and comparing funds.

And for your whole range of services?

Frédéric Picard: In our range of products, we have elements other than the classification to assist in the selection of funds. In particular for a product such as Style Analytics which we have developed on the basis of EDHEC’s research work. To understand the fund, one needs to analyse its style and study its stability, through a set of risk indicators, including extreme risks with a Value-at-Risk calculation, and approaches in terms of peer groups based on the betas and not on the performance. Nonetheless, one has to remember that most financial communication on the funds is based on the past performance alone and in this context the classifications remain important in promoting the funds. If you add that the classification is the main element of differentiation for each performance measurer, you have the explanation for the ever increasing amount of detail in the classifications in the English-speaking world.

Are there any technical developments that are planned in the area of classifying fund managers?

Frédéric Picard: The inadequacies of the rankings mean that a large number of investors no longer trust either the rankings or the numerous awards given out by the financial press and the ratings agencies. This is a pity, because the investor needs benchmarks in a market where there is a plethora of offerings. It is important that the classification techniques progress so as to offer the market relevant reference points. With the support of EDHEC, we have launched a large-scale project to revamp our classifications so as to create categories that are more homogenous in the area of risk.