Institutional Investment - April 15, 2009

The impact of regulation on how institutions manage their assets will remain a critical issue over the coming years - an interview with Nathalie Boullefort-Fulconis

In this month's interview, Nathalie Boullefort-Fulconis, Global Head of AXA IM Distribution, talks to us about the conclusions of EDHEC's recent research on the impact of regulation on the asset-liability management of European pension funds, AXA IM's business strategy for the future and the impact of the current crisis on institutional investors.

Nathalie Boullefort-Fulconis

The research results from the first year of the EDHEC AXA Investment Managers "Regulation and Institutional Investment" research chair have just been released. There are two notable conclusions from this research: that pension funds should build internal models to evaluate the risks of their investment strategies and that regulators should be more willing to tolerate short-term risk. What in your view is the impact that this kind of result can have on institutional investment in general and on investment management offerings in particular?

Nathalie Boullefort-Fulconis: First, with regards to short term risk, it should be stated that as an asset manager, we have learnt to integrate the effect of regulation in the design of asset allocations for clients. Using the right portfolio construction methodology, it is possible to face the short term risk constraints imposed by some regulators. Whether short term risk is a good area on which to focus the regulation of pension funds, who are long term investors, is a complex issue and we are pleased to see at last an in-depth analysis by EDHEC. Throughout the recent crisis, we have witnessed a lot of pension funds being forced to liquidate their equity portfolios due to short term solvency constraints, and this seems to confirm the so-called "procyclicality " effect. This means that, by selling assets during a crisis, pension funds may increase an already high volatility. This also forces them to sell in bad conditions.

As a provider for many large pension funds, we have seen a great deal of clients struggling to meet the demands of their regulator. Estimation of risks is done crudely, it is often outsourced to an actuary or a consultant and thus not updated very often due to the fee structure. Using internal models and a more long term approach may help in this respect. Indeed, we have witnessed the insurance industry change its approach due to the introduction of Solvency II and start to use internal models to compute their economic capital requirement, which has led to a much better understanding of risks by CIO's as well as to a better asset allocation design. By better understanding their risks through an internal model, they can constantly review and adjust their asset allocation. However the fixed costs of an internal model do not always make sense for small to medium-sized pension funds, and for us the development of fiduciary management in countries such as the Netherlands is a way to address this issue: the fiduciary manager aims to provide the benefits of an internal model in a more user-friendly fashion.

The research carried out also shows that equities can act as a hedging asset that is imperfect but probably indispensable over the long term for pension funds' risk of wage inflation. Do you not think that in the current climate there is a risk that institutional investors will withdraw massively from this important asset class?

Nathalie Boullefort-Fulconis: We have already witnessed a massive de-risking on equities on the part of some pension funds in reaction to their regulatory requirements - this was achieved either through outright sales or by hedging through derivatives. In effect, it is logical to decrease your exposure if you are bound by strict short term solvency requirements. We believe that it would be possible to take a longer term view if the regulatory requirements were relaxed, and therefore maintain a long term exposure to equities. However, we also believe in diversification and would favour a more diversified "risky asset" mix that would include not only equities but also for example infrastructure, real estate, private equity and commodities. These assets could also contribute more efficiently to generating performance in excess of inflation over the very long run, and this mix might be less volatile.

EDHEC's research in this case focused on four major European countries for institutional investment: the Netherlands, Switzerland, Germany and the United Kingdom. Could you tell us a little about AXA IM's presence in these countries and your strategic plan for each?

Nathalie Boullefort-Fulconis: On many levels, the investment issues and requirements of pension funds and insurance companies tend to be quite similar. As a wholly owned subsidiary and primary asset manager of the AXA Group, both a demanding and challenging institutional client, AXA IM constantly develops and improves the quality of its solutions, notably regarding long-term investment strategies, investment processes, risk management and product innovation. For example, AXA IM has been a pioneer in Asset Liability Management solutions and also offers strong expertise in risk management solutions such as Liability Driven Investments.

Today, AXA IM’s positioning is largely institutional and its commitment to these four markets remains very strong. Indeed, AXA IM has been developing for several years a pension fund client base in each of these countries and has provided them with a full range of investment solutions ranging from LDI to Alpha engines -be they mainstream or alternatives.

Have the events of the past 18 months modified your business strategy and your approach to European institutional investment in any way?

Nathalie Boullefort-Fulconis: AXA IM’s business strategy remains unchanged following the crisis, crisis which has both confirmed the importance of having a comprehensive approach to understanding clients’ needs and demonstrated the strong impact of regulation on clients’ allocations. From that standpoint, combining our multi-expert offering with a strong financial engineering capability has revealed itself to be a well-adapted approach to a very turbulent environment characterised by an exceptionally high level of volatility in financial markets. Beyond an adequate product and services offering, we have strengthened client proximity and dialogue, two essential elements in this type of context.

EDHEC's researchers will now be addressing the theme for the second year of the research chair: a survey of the financial management practices of European pension funds and the integration of regulatory constraints. What are your expectations for this new research programme?

Nathalie Boullefort-Fulconis: We believe that the impact of regulation on how institutions manage their assets will remain a critical issue over the coming years, in particular in the current market environment in which pension funds will have to overcome significant under-funding issues. Looking at how regulations constrain the asset-liability management is one particular angle amongst others. The EDHEC researchers will now focus more on reality and practical issues. By talking to market participants, we aim to highlight the areas where pension funds really struggle when implementing their strategies in a regulatory-constrained framework. Basing ourselves on the outcome of this analysis, we are looking to contribute to finding new ideas and solutions, the ultimate goal being to help pension funds to improve their management and/or processes.

With the research resources that you have at your disposal within AXA IM, what do you think are the advantages of also working with sponsoring an academic team such as the EDHEC Risk and Asset Management Research Centre?

Nathalie Boullefort-Fulconis: AXA IM has been committed to supporting academic research for several years now as we are convinced that it enables to strengthen the knowledge of market actors (institutional investors, asset managers….) as well as contributes to the emergence of best practices across the industry. In a certain way, we play two complementary roles. As a key partner of the EDHEC Risk and Asset Management Research Centre, we support academic research, fully endorsing their conclusions. As an asset manager, we consider that our core strengths lie in our ability to implement investment strategies and to translate research views into solutions for our clients. As such, supporting the EDHEC Risk and Asset Management Research Centre fits quite naturally in our strategy. Our common ambition is to increase the awareness of institutional investors not only on the development of regulations but also on the progress of research in asset management and ALM so that they can face the new challenges brought about by ever-evolving regulations.

About Nathalie Boullefort-Fulconis

Nathalie Boullefort-Fulconis joined AXA Investment Managers (AXA IM) in January 2003 as Global Head of Institutional Business and as a Member of the Executive Committee. She has been appointed Global Head of Sales, Marketing & Client Service and Deputy CEO in July 2005. In 2007, she became Global Head of AXA IM Distribution and was elected as a member of the Management Board.

Nathalie Boullefort-Fulconis has 24 years of experience in the asset management industry, beginning her career as an analyst in 1983 at "Associés en Finance" a consulting company specialized in quantitative equity management and asset allocation techniques. In 1993, she joined Paribas Asset Management’s Institutional Business covering French institutions, becoming Head of the French Institutional Business in 1997. In 1998 she took on the additional responsibility for the Product Management. From 2000, after the merger between BNP and Paribas she was appointed Global Head of Institutional Business Development at BNP-Paribas Asset Management.

Nathalie Boullefort-Fulconis holds a HEC diploma (Ecole des Hautes Etudes Commerciales, France) and a post-graduate diploma in Finance from Dauphine University in Paris.

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