The summer market storms are becoming more and more seasonal, but nevertheless, they still take everybody by surprise.

Even the money managers, who have many options to hedge their investments at virtually no cost, didn't do so," points out Dominique Hartog, CEO of Véga Finance, a subsidiary of Caisse des Dépôts in Paris.

However, Hartog adds that despite the market slump cancelling previous gains for the year, it has bounced back some 15% since from its mid crisis low.

Subsequently, he still considers 1998 'a good year', and even a very good one for bonds.

This increase is probably the factor currently making French institutions feel immune from the equity slump, with most mainly invested in fixed income.

The specifics of French institutions also keep them relatively insulated from intra-year worries. "As their accounting usually operates on an annual basis, they only have to make provisions for market losses at the year end", suggests Hervé Douard, partner at Fixage, a Paris based asset-liability consulting firm.

Therefore, as long as the Paris Bourse didn't drop below its year opening level, institutions were not really threatened.

"What hurts institutional investors more is a drop in interest rates," Doard adds. And with 10 year government bond yields plunging below 4% in early October, most institutions faced a huge dilemma over whether to invest new cash flows.

To that effect, the market drop gave them some incentive to increase their equity exposure at lower costs.

"Many institutions remained buyers at the end of August, and haven't stopped buying until now," according to Jean-Claude Leconte, president of Image & Finance, a consulting firm which surveyed French institutional investors earlier this year.

The 70 institutions he studied had 75% of their long term assets in bonds, almost entirely French, and 25% in equities, of which three quarters were at the Paris Bourse. Such minimal exposure to equities, and international markets in particular, shielded them from the turmoil.

But even those who had sold at market peak, now feel forced to reinvest their proceeds. "We had taken advantage of the market rise to sell a part of our convertible bonds and equity exposure, but not all of it, because other investments were hard to find," says Jean-François Naud, CEO of MAVPS, a mutual company with F45bn in life insurance assets. Having parked most of its gains in cash, MAVPS is now considering investing in equities again. But only with the caution French investors have always shown toward the Bourse. Gilles Pouzin"

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