Ethical Performance
inside intelligence for responsible business


asset managers ‘lack clarity’ on SRI strategy

July 2006

A French state pension fund has complained that many of the asset management companies which recently bid for mandates to manage €600million ($760m, £410m) of its funds along socially responsible lines failed to offer a clear SRI philosophy.

The French Pension Reserve Fund (Fonds de Reserve pour les Retraites, or FRR) has selected five asset managers – AGF, Dexia, Morley, Pictet and Sarasin Expertise – from 40 that applied.

But Nada Villermain-Lecolier, FRR’s head of manager selection and SRI policy, said many bidders failed to explain how their chosen SRI approach would benefit the fund, and why it was important. ‘The asset managers’ philosophy on SRI wasn’t always clear or deep enough,’ she said. ‘A lot of them just said they wanted to do SRI because it outperforms traditional methods of investment, but that’s not something there’s any certainty about, and focusing the motivation for SRI on performance was not OK for us.’

She added that while many asset managers talked about outperformance, when FRR analysed the bidders’ SRI funds under management, the trend for them as a group was to underperform.

Villermain-Lecolier said there was also a general ‘lack of clarity’ about how managers proposed to select equities and noted that most relied on external research teams. Where in-house teams were used, these were ‘often small and recently constituted’.

FRR found that the investment strategies were mainly what it termed ‘first generation’, focusing on the exclusion of stocks rather than engagement with companies. In the first round, only one investment manager offered a best-in-class approach allied to engagement, an approach favoured by FRR. ‘In general the managers took a universe, applied SRI filters and then came up with a new universe,’ said Villermain-Lecolier.

She added that management costs were higher than for traditional portfolios – up to twice the normal rate. However, FRR had not been disappointed by overall bid quality. ‘We are very happy with the final result, which is what counts.’

The five-year mandates relate only to European equities. FRR announced two years ago that it intended to take more account of social and environmental considerations when making investment decisions.

FRR is likely to be the largest single European institutional investor by 2020 with about €150bn under management, though it has not specified what proportion will be managed on SRI lines.

The body that administers France’s newly-established supplementary pension scheme for civil servants is planning to invest its entire initial €1.5bn of assets along SRI lines. ERAFP (Établissement de Retraite Additionnelle de la Function Publique), which was set up in 2005 on behalf of 4.6m public officials, has invited bids for mandates which will increase the value of institutional funds managed along SRI lines in France by nearly a third. The current value of SRI institutional investment in France is €5.15bn, according to the Novethic consultancy.

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