Transcript Paris EUROPLACE 2007

1
14:00/15:15- Panel 3
Challenges of Pension Funds and
Long Term Investments : What Liability
Driven Investment can Bring ?
2
Challenges of Pension Funds and Long
Term Investments: What Liability Driven
Investment can Bring ?
Jean-François BOULIER,
Head of Euro Fixed Income and Credit,
Crédit Agricole Asset Management Paris
Thierry MEQUILLET,
Chief Executive Officer Asia,
Crédit Agricole Asset Management
Mumbai, Wednesday, May 16, 2007
3
Summary
I – What is CAAM ?
II – What a new concept, LDI, can bring to an old
problem, managing pension funds ?
4
What is CAAM ?
Thierry MEQUILLET
Chief Executive Officer,
Crédit Agricole Asset Management Hong Kong Branch
5
Quick glance at
Crédit Agricole Asset Management Group


In the Top 10 within Continental Europe (1)
and N° 1 in France in mutual funds (2)
with € 534.8 bn AUM as at 31 December
2006
Breakdown by type of
clients
33%
8 investment centres worldwide
67%

2,137 employees including 546 investment
professionals
Institutions & Corporates
Retail networks
Data as at 31/12/2006 - Sources:
(1) IPE - Top 400 European Asset Management Leaders, data as at December 2005, issued in June 2006
(2) Europerformance - Investment funds, December 2006
6
A multi-specialist in asset management
AUM in bn euro
at 31 December 2006
€ 534.8 bn AUM
450.1
Fundamental
Active
Investments
Crédit Agricole Asset Management *
16
44
Specialised
Investments
CASAM
Structured
management
CAAM AI
Alternative
Multimanagement
* 65% of CAAM SGR AUM in Italy
Source CAAM
0.8
Systeia
Alternative
management
19.7
CPR-AM
Quantitative
management
1.4
IDEAM
SRI
2.8
CAAM
Real Estate
Real Estate
7
Breakdown by asset class
EUR 534.8 bn AUM as at 31.12.2006
Breakdown by asset class:
Equities: 80.6
(in bn euros)
4%
5%
15%
Balanced: 50
10%
9%
Bonds: 231.7
Money market: 67.6
13%
Absolute return: 54
Alternative: 23
44%
Structured: 27.9
8
Multi-faceted expertise
Quantitative funds (1)
SRI (2)
Alternative funds (3)
Funds of hedge funds (4)
(5)
Structured funds
Absolute Return
Multi-management
Specialised
funds
Indexed
Mid & small caps
Large caps
Emerging countries
Sector
Thematic
Balanced
funds
Core-Satellite
Equity
management
Fixed
Income
Via CPR-AM (1), IDEAM (2), Systeia Capital Management (3), Crédit Agricole Asset Management
Alternative Investments (4), Crédit Agricole Structured Asset management - a 50% CAAM-Calyon JV - (5)
Euro money
market
Euro government
and corporate
bonds
Global bonds
Emerging
countries bonds
9
A dynamic international development

€ 534.8 bn AUM as at 31.12.2006
International breakdown by
geographical areas
(excluding France & Italy):
Breakdown:
International € 52.5 bn
(excluding Italy)
Breakdown :
France/Italy/International
 Europe: € 32.5 bn
 Asia/Pacific: € 13.8 bn
4,6
6,2
68,3
2,5
 Rest of the world: € 6.2 bn
7,2
52,5
7,6
414
France
International
Italy
Source: CAAM
2
10,6
6,8
2
3
Hong Kong
Japan
Korea
Spain
Germ/Aust
Nordic countries
UK
Benelux
Switzerland
Rest of the world
10
A « multi-local » approach
 8 investment centres,
in close contact
with the markets
Paris
Hong Kong
London
Milan
Madrid
Singapore
Tokyo
Seoul
 An extensive sales
presence worldwide
Focus on CAAM’s development in Asia - Pacific
11
NACF-CA Investment Trust
Management Company
Joint Venture in Seoul between NACF
(60%) and CAAM (40%)
Since January 2003
Number of staff: 50+
CAAM Japan Limited
Since 1986
Number of staff: 100+
 more than 20 years history,
 more than 200 staff in the region.
Beijing representative office
Since December 2006
CAAM Hong Kong Limited
Since 1982
Number of staff: 60
CAAM Singapore Limited
Since 1989
Number of staff: 30
Sydney representative office
Since January 2007
12
CAAM : a pioneer in Indian investment

CAAM Asia has more than 15 years of India investment experience

CAAM Asia created third India fund in 1990, the Himalaya Fund

Launch of CA Funds India in January 2006, which aims to achieve
long-term capital growth by investing in a concentrated selection of
listed equity securities of Indian companies. This Luxembourgdomiciled sub-fund is managed by CAAM Hong Kong Ltd. with more
than $ 400 mn AUM at the end of March 2007

The investment team benefits from in-depth and long-standing
knowledge of some of India’s most important companies
13
What a new concept, LDI, can
bring to an old problem,
managing pension funds ?
Jean-François BOULIER
Head of Euro Fixed Income & Credit,
Crédit Agricole Asset Management Paris
14
Market overview – OECD pension scheme assets

Global pension asset size (US$bn) (Source: Watson Wyatt 2007)
15
Asset Allocation has been evolving recently

Pension funds allocation shows signs of becoming more defensive
but at a slow pace (apart from the UK)
16
1
New paradigm
in asset allocation
17
A Challenging accounting and regulatory environment !
Pension funds and Insurers are facing
two apparently contradictory issues
Increase the return of their portfolio in a low return environment
Control the sources of volatility of their balance sheet and
statements resulting from the application of new accounting
(IAS/IFRS) and regulatory rules (Solvency II)
These requirements result in a need to
manage Asset/Liability equilibrium
&
seek for more return on asset portfolio
The answer: Liability-Driven Investment (LDI)
18
What is behind LDI : some stylised facts
Typical Pension Fund Allocation
Equities
30%
Bonds
45%
Portfolio Risk Contribution (bp)
Active Bonds
Real estate
Absolute
performance
10%
Absolute
performance
Equities
Real estate
15%
0
100
200
300
400
500
600
700
800
600
700
800
A/L Risk Contribution (bp)
Volatility/Duration
Interest Rate
0.8%
Equities
15.0%
Absolute performance
5.0%
Real estate
10.0%
Bond benchmark
6y
Liabilities
15 y
Actuarial uncertainty
1y
Source: CAAM
Actuarial
Incertainty
Interest rate
0
100
200
300
400
500
Where does your risk come from ?
19
Basically, LDI raises QUESTIONS & requires DECISIONS
Addressing Risks
Making Decisions
Interest rate risk
Current Asset Liability Gap
increases for a decrease in
rates
Duration hedging protects fund
solvency and sponsor equity
Inflation risk
A rise in Inflation
increases liabilities
Inflation linked bonds or swap
overlays protects against
inflation rise
Mortality risk
Increased life expectancy
of 1 year for every 4 years
extends the duration of
liabilities
Excess volatility of equity,
concentration risk…
Adjusting the required duration
hedge helps mitigating the gap
Asset risk
New Asset Allocation with more
downside protection
20
Strategic Allocation: old versus new paradigm
Asset only efficient Frontier
Expected
return
Typical asset
allocation
Envelope of risk
around the Liability
Matching Portfolio
A/L Portfolio
Absolute Risk
Total Return
Liability Driven Investing
Model
Efficient Frontier/ CAPM
Asset Liability Management
Objective
Risk Measure
Risk Free Asset
Correlation
High Long term returns
High and stable surplus value
Volatility of returns
Volatility of funding ratio
Cash
Liability Matching PTF (fixed income)
Maintain low correlation of assets
Assets should be positively correlated
with PV of plan liabilities
Rationale
On the run, assets will outperform
liabilities and minimise plan costs
Asset objectives should firstly be linked
to pension liabilities
21
2
LDI according CAAM
22
LDI means: “Strategic Asset Allocation decision”
The high return block
The matching block


Fixed income management
High return asset classes: Equity, Private
Equity, Hedge Funds

Hedging duration & inflation risks

Active management on each asset class
Liabilities
Matching
liabilities
Matching
Slice
High Return
Slice
Optimising the
asset return
Synthetic hedge of the
liability benchmark
Meeting the fund’s objectives
23
Our convictions : Active management of liability matching
CAAM’s approach
Traditional approaches
Duration matching
Cash-flow matching
Risk Matching
Sensibilités / Piliers nominaux
14.00
4.00
3.50
10.00
8.00
3.00
2.50
2.50
6.00
4.00
2.00
2.00
1.50
1.50
2.00
1.00
1.00
0.00
0.50
0.50
3.68
3.50
3.03
3.03
3.00
Y
Y
0.00
0.00
23
Y
Y
Y
Y
Y
21
19
17
15
13
9Y
CF_liabilities
11
7Y
5Y
3Y
1.98
EUR
1M
EUR
3M
EUR
6M
EUR
1Y
EUR
2Y
EUR
3Y
EUR
4Y
EUR
5Y
EUR
7Y
EUR
9Y
EUR
10Y
EUR
15Y
CF_asset
Liabilities
Principle : define
asset allocation which
cash flows match
exactly liabilities’ cash
flows
Assets
Principle : define
asset allocation which
duration best
replicates the liabilities
duration
EUR
20Y
EUR
30Y
EUR
50Y
alternative
1Y
12.00
EUR
1M
EUR
3M
EUR
6M
EUR
1Y
EUR
2Y
EUR
3Y
EUR
4Y
Liabilities
EUR
5Y
EUR
7Y
EUR
9Y
EUR
10Y
EUR
15Y
EUR
20Y
EUR
30Y
EUR
50Y
Assets
Principle
 Analysis of liabilities cash
flows shape
 Construction of a liability
benchmark having the same
risk profile as the liability's
!
Not very
flexible
structures
 The
liability benchmark
aims to minimise the A/L
volatility
24
Our convictions : Alpha as a plus
Management under
specific constraints
Specific accounting budgets
Regulatory guidelines
Restricted investments
Capital gains
Tax issues…
Alternative
investments
Real estate
Private Equity
Hedge funds…
Alpha generation
Niche products
Portable alpha
High alpha expertises…
Asset Allocation Analysis
Objectives’ assessment
Strategic asset allocation
Dynamic management (CPPI…)
Structured products
Structured credit (CDOs, CLOs..)
Structured bonds
…
…
Alternative Beta
Volatility
Commodities
CAT bonds…
CAAM Group: a bundle of expertise for long term investors
25
LDI according to CAAM : Our approach
Expected outperformance
A
+
B
3
Liability
matching
1
Definition of an
2
Optimal LDI portfolio
Investor’s
Definition of a
Definition of a
liabilities
Liability benchmark
Liability matching benchmark
Overall risk budget
Liability matching risk budget
Risk budget accepted by the investor
Booster
26
LDI in CAAM = combining ALM and Asset Management
Fixed
Income
LDI: combining
strength in fixed
income, structuring
and asset allocation
Asset
Allocation
Expertise
Liability
Driven
Investment
Platform
 8 open-ended funds
 6 LDI specialists
Fund managers
Product Specialists
Engineers in quantitative
research
 3.8 billion euros under LDI
management
4 euro bonds funds
 1 inflation linked bonds
funds
3 LDI leveraged funds
27
3
What perspectives?
28
Leading players in continental Europe have started to
show the direction

Recently, ABP took important strategic decisions
that are clearly consistent with LDI management
ABP strategic Asset Allocation
35%
04-06
30,5%

The bond risk premium is low at historical standard
and should remain low for the next 3 years.

07-09
30%
27%
25,0%
25%
23%
Idem for the credit
20%

Therefore, it seems more rewarding to re-allocation
15,0%
15%
a portion of the current fixed income portfolio to
equity (emerging zones) and alternative
10,0%
9%
10%
10%
7%
5%
3,5%
5%
5% 5%
4,0% 3,5%
2,0%
2%
2%
Corporate Bonds
Gov Bonds
Innovation
Real Estate
Inflation Linked
Higher duration of the bond portfolio: 4,8 to 8 years
Infrastructure

Hedge Funds
Increased weight of inflation-linked bonds: +3%
Private Equity

Convertible Bonds
liabilities must be mitigated
0%
Emerging Equity
A contrario, inflation and duration risks on the
2%
0,0% 0,0%
Equity OECE

4,0%
3%
2,5%
Commodities
investments (hedge funds, innovation…)
Source: ABP
29
LDI will drive changes for the fund industry future?

Implementation of LDI is at different stages across Europe


Regulators pressure is key for LDI development
LDI has started with a reshuffling of the fixed income portfolio

Higher fixed income allocation

Reduce the duration gap

Increase use of derivatives to hedge duration & inflation risk

Currently, one observes an increasing demand for Absolute Performance and
Alternative Investment products (levered or not)

Asset managers and Investment banks have hired dedicated teams of
specialists to provide actuarial, financial services and investment LDI
solutions

Ranges of pooled funds (nominal & inflation linked) have been launched in
the UK and Euro Zone as well as more customised investment solutions
30
Conclusion

Pension Funds all over the world face many challenges :
demography, low rate environment, inflation pressures,
funding status

Thanks to a proved experience of management of long
term provisions and to dedication to innovation, CAAM
offers LDI solutions to meet these challenges
31
14:00/15:15- Panel 3
Challenges of Pension Funds and
Long Term Investments : What Liability
Driven Investment can Bring ?
32
Mumbai, Wednesday, May 16, 2007
1ST FRENCH-INDIAN FINANCIAL FORUM
European Financial Markets:
Opportunities for Growth
and Value Creation