French fund adapts to reversal of cash flow
What do you do as an investment fund when your mandate changes from a cashflow-positive, medium-term horizon to a cashflow negative situation, where your major beneficiary is withdrawing 6 per cent cash a year?
That was the challenge facing the French Fonds de réserve pour les retraites, (FRR) the €36 billion ($41 billion) investment vehicle to offset the French pension system, FRR executive director Olivier Rousseau said.
Rousseau spoke at the recent Fiduciary Investors Symposium in Healesville, Vic, about governance, investment strategy and the fundamental purpose of the FRR as a result of the GFC. FRR was founded in 2004 with commitments from government to make cash contributions through 2020, but the financial crisis disrupted the strategic asset allocation and the strategy of investing 60 per cent in equities.
“Some funds are created lucky, others are created less lucky,” Rousseau said. “I think there’s a better start in life when you start investing in 2008, 2009, than when you start investing in 2004. You’d probably agree with me.
“The tensions that we went through exposed some of the imperfections in our governance; not to say that it’s bad, but it wasn’t totally perfect. Because after the crash of the stock market, we thought at the beginning of 2009 that it would be smart to reduce risk a bit. I’m not saying totally get out, but reduce from 60 to 45 per cent in equities – that meant crystallising a loss. That’s not a good start.”
As a result of the financial crisis and drastic changes to fiscal policy, the French Government halted cash contributions, Rousseau said.
“The government decided to stop giving money to the FRR and, on the contrary, to open the tap,” Rousseau said. “That’s a bad surprise. You were investing with the prospect of getting positive cash flows to 2020, suddenly you’re told, sorry guys, you are cashflow negative 6 per cent a year.”
Rousseau labelled the FRR “mildly raided” by the French Government, through 14 annual payments of €2.1 billion each, and noted that the fund has changed to a liability-driven investment (LDI) strategy as a result. Today, it runs an internal leverage program, Rousseau said.
FRR is well known for its focus on ESG integration. It developed a low-carbon leader’s index with MSCI, Swedish fund AP4 and asset manager Amundi.
“We have identified the climate risk as a big issue for a long-term portfolio, even for a medium-term portfolio like ours,” Rousseau said. “In 2015, you have the COP21 on Climate Change in Paris, you are a public institution, and you are going to do zippo on climate in the period ahead? How mad are you? We knew that we had to articulate something sensible by ourselves, otherwise something stupid would be imposed on us.”
FRR engages in a tactical asset allocation program, which has led it to be overweight eurozone equities and underweight US equities, which Rousseau admitted was “good in 2016, bad in 2017, and it’s still bad this year”.