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Institutional Investment - December 13, 2010

The benefits of controlled dynamic asset allocation strategies - an interview with Frédéric Surry

In this interview we talk to Frédéric Surry, COO Multi-Expertise Investment Centres at BNP Paribas Investment Partners about the most recent research publication from the BNP Paribas Investment Partners research chair at EDHEC-Risk Institute on asset-liability management and institutional investment management, the advantages of dynamic risk-controlled strategies, and the consequences of the recent financial crisis for the investment management industry in general and BNP Paribas Investment Partners in particular.


Frédéric Surry

EDHEC Risk Institute has just released a new publication from the BNP Paribas Investment Partners research chair entitled “An Integrated Approach to Asset-Liability Management: Capital Structure Choices, Pension Fund Allocation Decisions and the Rational Pricing of Liability Streams”. Do you think that the results on optimal funding and investment decisions will prove useful in discussions with your clients?

Frédéric Surry: The first year of the chair made a major contribution to the current debate on the regulation and management of pension funds. We were able to show our clients that dynamic management of the allocation to the hedging portfolio and to the performance-seeking portfolio made it possible to integrate funding ratio objectives or constraints. There were matters having to do with the alignment of the interests of the stakeholders: pensioners, bond-holders, shareholders, and sponsor.

In the wake of the work recently done with EDHEC as part of the chair, we are putting together an integrated approach that shows that it is possible to make allocation decisions optimal, above all, in terms of sponsor contribution policy, thus taking into consideration the sponsor’s financial situation. New light is also shed on accounting and prudential regulations.

All the conclusions from this research continue to prove the benefits of controlled dynamic asset allocation strategies and to enrich our discussions with our clients.

One finding of the paper is that dynamic risk-controlled strategies enable better alignment of shareholder and pensioner incentives. To what extent do you see dynamic liability-driven investment (LDI) strategies being adopted in the marketplace?

Frédéric Surry: The recent crises have drawn attention to risk management practices. Negative equity market returns, creating funding gaps, have encouraged stakeholders—pensioners, shareholders, sponsors—to discuss anew the objectives, the solutions, and the recommendations, such as the accounting standards SFAS87 and IAS 19. One question that arises is whether it is possible to improve the current situation through better asset allocation decisions. Our answer with EDHEC is clearly that it is. Thanks to this integrated approach, we can illustrate the risk-taking dilemma between shareholders and pensioners. If the pension fund is under-funded after a crisis, and assuming pensioners have no access to any pension fund surplus, shareholders would like to increase the risk to reduce the impact on future contributions, whereas for the pensioners it is the other way around.

To conclude, if we can allow pensioners to benefit from this increase in expected performance, we can align the respective interests of the parties. This illustration demonstrates that we can find optimal solutions, improving the risk/return profile for each party and meeting market expectations.

The extension of the research from a static setting to a dynamic one naturally increases the complexity of the analysis. Is this likely to be a problem in your dialogue with the markets?

Frédéric Surry: It’s true that the extension of the research integrates new variables and additional dimensions. But in our view, it’s less a “recipe” than it is a framework for looking at the interaction of capital structure decisions at the sponsor level and allocation decisions at the pension plan level. We need to adapt it depending on the client, on regulation, on the funding ratio, and on the financial situation of the company. This framework, complemented by these elements, favours discussion and in-depth analysis; it ultimately helps our clients make optimal decisions.

The industry is emerging from a difficult period in 2008/2009. What do you think the future holds for BNP Paribas Investment Partners and what are some of the lessons that could be learned from the financial crisis?

Frédéric Surry: The crisis has brought home the importance of risk management, regardless of the risk—market risk, liquidity risk, operational risk, regulation risk. Because of its force, and because of the massive short-term consequences for institutional investors, the crisis has also made obsolete approaches founded exclusively on long-term hypotheses of financial assets.

In addition, institutional clients have a right to expect greater transparency in the products they are offered by the managers of their assets. These elements will encourage institutional investors to modify some of their practices and to rely more heavily on asset managers capable of offering them complete packages, packages incorporating, as it happens, these new dimensions.

As a result, one must expect that the asset management industry will continue consolidating. The appearance of global, multi-expert firms benefiting from a sound financial structure is an ongoing trend. Asia and the Middle East will continue to experience swift growth, and BNPP IP is very active in these regions and plans to increase its activity there even more.

What is your overall assessment of the work of the “Asset-Liability Management and Institutional Investment” research chair?

Frédéric Surry: Over the years EDHEC-Risk has proven its ability to combine academic research, pragmatism, and a sense of the reality of the practitioners in the financial industry. For our part, at BNPP IP, we have long known that the industry is driven by differing expectations: a trend toward simplification and transparency in certain products and a growing need for sophisticated, customised solutions.

We have had fascinating debates between researchers and practitioners from our financial engineering team. These debates have enabled us to reconcile modelling objectives and the concrete cases we work on with our clients. The quality of the results of the partnership between BNPP IP and EDHEC-Risk has enabled us to enrich our expertise and our risk management solutions, as well as to reach one of the main objectives of BNPP IP, which, in addition to creating performance, is to keep on innovating.



About Frédéric Surry

Frederic Surry joined BNP Paribas Investment Partners in 2007, as Head of IBS (Investment & Business Solutions) for BNP Paribas Asset Management. As such, he was responsible for developing added-value solutions and services for both clients and management teams. Fréderic began his career in 1996 as a financial engineer specialising in capital markets for BNP Paribas. In 1999 he joined the financial engineering team of Crédit Lyonnais Asset Management as a balanced portfolio manager before progressing to head of the Asset Allocation division. Prior to assuming his current role, he held the position of head of client servicing and process within the Balanced Management and Strategy division and later within the Equities, Asset Allocation and Arbitrage department of Crédit Agricole Asset Management.

Frédéric holds a post-graduate degree in Financial Markets and Intermediaries and a Master’s degree in Economic Statistics from the University of Toulouse, France (1996).