Keeping to his horizon

Who is or was your biggest mentor in pensions and investments and why?

It would be inappropriate to speak about a single ‘mentor’. Actually, like so many of us, I have had the chance to progress during my career by learning many useful lessons from colleagues and superiors, which are highly valuable in my current assignment. Common sense, pedagogy and clarity of thinking I count among the worthiest of them. Antoine Frachot, today’s chief risk officer at Groupe Caisses d’Epargne, and Jean-Philippe Cotis, current OECD chief economist, were key teachers in that respect.

 

Who do you most admire in the industry and why?

I show true admiration for teams or institutions that have succeeded in going beyond their initial constraints or environment to develop themselves in a way consistent with their beneficiaries’ needs in the long run.

I also follow with great interest pension schemes - especially public ones - that are able to continually innovate and introduce technical improvements in their portfolio allocation or risk management. Denmark’s ATP is a good example of the capacity for strong innovation, introducing dynamic asset allocation or liability-driven risk management well before the current trend towards liquidity driven investment (LDI).

But among the people I admire most there are undoubtedly, and sincerely, my colleagues and staff - not only for the quality of their work but also for the patience they demonstrate every day putting up with my strong personality.

 

Which writers’ or economists’ books have influenced you the most?

When I was student I appreciated the way that Thomas Copeland and J Fred Weston’s ‘Financial Theory and Corporate Policy’ took us novices from utility function to basic applications in corporate or pension fund management. Later, David Swensen’s ‘Pioneering Portfolio Management’ gave me precious insights in strategic allocation and defining the investment process of long-term institutional investors. However, as a former economist, I was much more influenced by my readings in macroeconomics and industrial theory. Among them, Paul Krugman’s ‘Pop Internationalism’ was very useful when teaching economics. I was struggling to convince my students that globalisation was an opportunity, not a threat, and that imports - not exports - were improving social welfare. I have never before confessed this but I spend so much time with investment issues that out of office I prefer now to read the novels of Haruki Murakami than finance textbooks.

 

Which event, positive or negative, has influenced how you approach your present role?

Not a very original answer but the bear equity market of 2000-2001 is still very much alive in my own ‘read-only memory’ as it is, I suppose, in the minds of many investment professionals and pension fund officers.

Looking back, after the huge correction in the bubbling price increases of the late 1990s, it seemed like a period when nobody wanted to take risk any more in equities or other volatile assets. At that point, provided your time-horizon was long enough and unless you believed the world was about to regress to the Stone Age, the payoff profile for taking risk in equities looked incredibly favourable.

The ‘interest rate conundrum’ (2004-2005) was also a fruitful experience: when market prices cannot be explained anymore by traditional models, it is a great temptation to put forward structural or liquidity flow explanations. I am not saying such analysis did not play a role, but a simpler explanation - maybe that growth and inflation risks were underpriced - should not be rejected merely because it is simpler.

 

What is your investment philosophy?

My main job is asset allocation, both strategically and tactically. I try always to keep strategic and tactical decisions independent of each other and respective to their specific objectives and time-horizon. It’s very important for me to stick to the fund’s investment horizon, not being distracted by markets’ noise in the short-run. I can fear the risk of a decision but I do my best to fear it before taking the step, not after. And not to let fear occupy too much time in the decision process.

I try to always keep in mind the hierarchy of risks, from the cost of doing nothing to the shortfall risks due to implementation practicalities. I have hung a quotation by the mathematician, Benoît Mandelbrot on the wall just behind my chair: ‘People are individually refusing more and more infinitesimal risks while taking collectively increasing risks they can’t or they don’t want to assess’. It’s important for me to keep this in mind because that’s the kind of behaviour I would like to avoid.

 

What are the most important challenges facing the industry?

As far as the occupational pension fund market in France is concerned, there is still a huge margin for development and progress in the management of pension funds due to the tiny portion of funded schemes in retirement provision overall and the small average size of the individual funds, which does not help in embracing sophisticated investment policy. Until recently past performance has not been a key driver since demographic balances were quite favourable, but things will change very quickly and funds’ structures must adapt likewise.

On an international scale, if I turn to the investment management world, I would say that the playing field for long-only active managers is likely to continue narrowing between pure beta providers, investment banks able to deliver synthetic or customised solutions and hedge funds.

 

And finally, what is the future for reserve funds?

This concept is spreading around the world. We have regular meetings with other sovereign reserve funds of western countries. Recently I visited the Korea Investment Corporation and the Social Security Fund of China.

It’s amazing how, beyond the differences in regulation, governance and asset allocation, we share the same concerns and face the same kinds of issues.

One of them, probably the most important, consists in keeping our ability to attract new talent within a public structure. Until now we have succeeded by relying on the ambition of the project and the innovation it introduced at least on a local scale. But this is a quite fragile dynamic and if we stop innovating, it will become more and more difficult to slow the natural rate of departures.