Investment Management - October 22, 2009

The crisis has underscored the importance of managing risk, regardless of its nature - an interview with Philippe Marchessaux

In this month's interview, Philippe Marchessaux, CEO of BNP Paribas Investment Partners, discusses the initial conclusions of the research carried out as part of the BNP Paribas Investment Partners research chair on asset-liability management in institutional investment management, the future direction of this research and the consequences of the financial crisis for the international asset management industry.

Philippe Marchessaux

The research publication drawn from the first year of the BNP Paribas Investment Partners research chair on "Asset-Liability Management in Institutional Investment Management" was entitled "Measuring the Benefits of Dynamic Asset Allocation Strategies in the Presence of Liability Constraints". What do you think are the important messages from this research for institutional investors?

Philippe Marchessaux: The work in the first year of the chair makes a significant contribution to the ongoing debate on the regulation of pension funds. As it turns out, the conclusions drawn by this work suggest that tighter regulation of pension funds would not necessarily be costlier for pension funds or for pensioners.

The reluctance of investors to adopt optimal risk management strategies in the face of these funding ratio constraints, however, may well turn out to be particularly costly and inefficient.

The work shows that dynamic management of allocations to the liability-hedging and the performance-seeking portfolios is the optimal response to the existence of these constraints.

These findings strengthen our conviction that innovative and efficient management is that in which risk management plays a central role; innovative and efficient management is tailored to the investor’s particular situation.

The second year research of the chair will focus on an integrated approach to the ALM of corporate pension funds, incorporating the sponsor company. What are your aspirations for this research project

Philippe Marchessaux: On the strength of the highly convincing conclusions of the first year of the chair, we have chosen to broaden the scope of the analysis of asset/liability management choices, to include all stakeholders.

Indeed, when liability-management are made, pension funds and sponsoring firms must keep in mind the potentially divergent interests of future pensioners—the current employees of the sponsor— of shareholders, and of debt-holders.

The complex ties binding these stakeholders will be modelled: the impact of an asset allocation decision may not be the same at one initial funding ratio as it is at another. It may likewise depend on size of the liability relative to the balance sheet of the sponsor or on the degree to which the sponsor is leveraged.

It is important for us to be able to provide our institutional clients with tools, conceptual as well as practical, that enable them to make these structural decisions. Analysing current regulation and the interests of each stakeholder to objectify our clients’ aversion to risk is an important step on the way to making these conceptual and practical tools available.

With this approach, we pursue our strategy, which involves positioning ourselves as a strategic partner to our institutional clients: a partner capable of providing ever-more advice tailored to each client’s situation and environment.

In view of BNP Paribas IP's international experience and presence, how do you think the institutional asset management industry will be evolving worldwide after the financial crisis?

Philippe Marchessaux: The crisis has underscored the importance of managing risk, regardless of its nature (market risk, liquidity risk, operational risk, regulatory risk, or fraud risk), in asset management.

The force of the crisis, as well as the massive short-term consequences for institutional investors, has also rendered obsolete approaches founded exclusively on assumptions about the long-term behaviour of financial assets.

Institutional clients are also within their rights to expect greater transparency in the products offered them by their asset managers.

As a result, institutional investors will certainly change some of their practices, and they will rely more heavily on asset managers capable of offering them complete solutions, solutions incorporating these new dimensions.

So, the ongoing consolidation of the asset management industry is not likely to be interrupted. The emergence of global firms with multiple areas of expertise and a sound financial structure is a fundamental trend.

Asia and the Middle East will continue to be high-growth regions, regions in which BNPP IP is very active and in which it intends to become even more active.

You have been working with EDHEC-Risk on the "ALM in Institutional Investment Management" research chair for one year now. What initially attracted you to the idea of supporting EDHEC-Risk's academic research on this subject?

Philippe Marchessaux: Over the years, EDHEC-Risk has demonstrated an unrivalled capacity to reconcile academic research and the pragmatism and sense of reality of financial industry practitioners.

At BNPP IP, we have long been aware that the industry is propelled by rival forces: a trend toward standardisation, with a heavy emphasis on the cost/benefit ratio, and a growing need for sophisticated, tailor-made services.

Meeting this growing need requires mastery of the problems dealt with by our clients (among them the liability constraints they are subject to). So we have turned to Noël Amenc, Lionel Martellini, and the team at EDHEC-Risk to form this partnership, which has resulted in the endowment of this three-year chair.

The chair attests to our determination to provide advanced asset management solutions developed in accordance with the latest academic research. In this respect, this chair is already making good on its promises.

About Philippe Marchessaux

Philippe Marchessaux is CEO of BNP Paribas Investment Partners, having formerly been, amongst other positions held at the firm, Deputy CEO and Head of Wealth Management, Internal Distribution, Marketing and Communications. He is a graduate of HEC Business School, holds a BA in philosophy from the University of Paris-Sorbonne and is a member of the French Society of Financial Analysts (SFAF).

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