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Asset Management - May 20, 2009

The share allocated to real asset cash flow-linked products will increase substantially. An interview with Xavier Lépine.

In this month's interview, Xavier Lépine, chairman of UFG, discusses the new EDHEC UFG research chair on "Dynamic Allocation Models and New Forms of Target-Date Funds", the use of real estate in asset allocation, socially responsible investment, and the French market for life insurance and target-date funds.

Xavier Lépine

You have just launched a new research chair with the EDHEC Risk and Asset Management Research Centre on "Dynamic Allocation Models and New Forms of Target-Date Funds". What are your aspirations for this research chair?

Xavier Lépine: Academic research in the field of asset management for High Net Worth Individuals is, so far, poor. We do believe that private banking for asset managers with asset allocation and appropriate betas is one of the keys to address the needs of private bankers and their clients. Most of the time traditional asset allocation has limited input factors such as time horizon and volatility. We believe that a dynamic core-satellite approach in the framework of target-date funds needs fundamental research to properly address issues such as cash flow matching, inflation, the level of the financial markets and so on.

Do you think that the market for target-date funds, which is experiencing considerable growth internationally, has potential in France, when we are aware of the dominance of life insurance in long-term French savings?

Xavier Lépine: Even if the expected return of this academic study is predominately targeted to the European market, we are convinced that the French market, even if currently dominated by the “contrat en euros” (a life insurance product, extremely popular on the French market, which guarantees capital and accumulated returns), is clearly lacking appropriate methodology and investment solutions. Who can be sure that life insurance companies will continue to offer 4 to 5% returns when money market rates are close to zero and inflation close to deflation? We think that the French insurance market will dramatically change its offerings in coming years to take into account client needs and the financial risks of insurance. It will include segregated funds, variable annuities … Do not forget that we are just beginning the demographic era of what the French call the "papy (grandpa) boom" (boom in the number of people of retirement age) with the perception of long-term life expectancy.

In its research, EDHEC plans to integrate the real estate asset class into the life cycle approach. What in your opinion justifies the role of real estate in the long-term asset allocation of private and institutional investors?

Xavier Lépine: The current economic and financial market situation has stigmatised a number of weaknesses to properly cope with clients needs. The globalisation of markets has increased correlation and therefore the volatility of portfolios. Financial markets do not necessarily reflect economic growth and more importantly clients have a dissymmetric approach towards risk/return. Therefore we do believe that in the future the share allocated to real asset cash flow-linked products will increase substantially. Real estate and particularly commercial real estate, due to its intrinsic betas, will be a substantial part of clients’ asset allocation.

At the EDHEC Institutional Days on May 27, you conducted a workshop on integrating socially responsible investment criteria into real estate investment. Could you tell us a little about UFG's investment approach in this area?

Xavier Lépine: We believe that the world will continue to change dramatically in the coming decades. Demographic issues will lead the pack with “papy-boomers” in Europe and lately China and a population growing from 6 to 9bn inhabitants within the next 40 years. It is therefore clear that this macro trend will have a considerable impact on economics and environmental and social factors. That’s why UFG has decided to include SRI and economic sustainable growth in its investment approach. As a French market leader in non-listed real estate funds, it is not a surprise that we include this strategic dimension in our funds.

You have supported research at the EDHEC Risk and Asset Management Research Centre for a number of years now. What initially encouraged you to support academic research and why did you choose EDHEC?

Xavier Lépine: Academic research has to be orientated towards addressing professional needs. With the EDHEC Risk and Asset Management Research Centre we not only found an intellectual partner of high quality but also a counterpart which is able to understand our business. Up to now, most financial research has been dominated by the Anglo-Saxon world where professionals and academics work closely together (in some cases academics are investment professionals). We think that the EDHEC “research for business” model fills a gap and we are very pleased to be one of its partners.

About Xavier Lépine

Xavier Lépine, Chairman of UFG, has 25 years of experience in the alternative investment field. Prior to joining UFG Group in 1999, he began his career with Société Générale and Banque de l'Union Européenne. He later created FP Consult, an asset management company specialized in emerging markets, and became Chairman of the Board of Fortis Investment Management France. Appointed Vice Chairman and Managing Director of UFG Group in June 2006, he became Chairman of the Group in December 2006. Mr. Lépine holds a DEA in monetary economics and international finance from Dauphine University, Paris.