While most asset managers typically offer a mix of traditional and social responsible investment (SRI) products, France-based asset manager Crédit Agricole Asset Management (CAAM) Group has taken a different approach to SRI by creating a separate subsidiary, IDEAM, which exclusively offers SRI products.

IDEAM became the wholly owned SRI subsidiary of CAAM Group last October when it bought the remaining 10% shareholding held by IDEAM chairman Xavier de Bayser. The move was part of CAAM Group's policy of developing its SRI expertise, having already committed itself to increasing its involvement by signing the UN principles for responsible investment (PRI) in May 2006, according to IDEAM's CEO Michèle Jardin (pictured right).

The €1.4bn asset manager - consisting of 20 employees including specialist fund managers, a quant unit, a business development unit, a marketing and communications team and extra-financial analysts - offers a total of 19 mutual funds including sustainable development, ethical and charitable funds as well as thematic and mutual aid profiled funds.

"It is important for an asset manager like us to be involved in the market because SRI is developing very quickly," says Jardin. "We participate in several committees and conferences in France so we can continually work on this topic."

She adds: "Our investment philosophy is that SRI is the basis for the sustainability of companies' development. But it is important to deal with the portfolio risk before rather than after events. We believe we can lower the risk level of portfolios by identifying the risks that are most important to companies - such as management expertise, voting policies and investment processes - through environmental, social and governance [ESG] criteria. SRI is made for investors with a long-term investment horizon such as pension funds, as it is capable of delivering outperformance in the long term."

IDEAM's flagships are its euro and European best-in-class equity products, its European governance equity fund and fund-of-fund money market fund with a solidarity approach, says Jardin. She adds that IDEAM's credit product is also popular, encouraged by the current market trend towards more defensive markets.

"Since we started out in July 2003 the SRI market has changed," Jardin explains. "The first generation of SRI funds in the UK and the US employed negative screens, in other words they excluded sectors such as alcohol and tobacco. However, more recently the SRI market has been adopting positive screens such as the best-in-class approach."

While also tailoring mandates according to client demand, IDEAM does not exclude certain sectors or companies from its funds. Instead it applies a best-in-class approach to its core portfolios. It has also started funds with a sustainable development theme. The first is the Aqua Global water fund, which was recently launched in the UK following earlier launches across Europe.

According to fund manager Antoine Sorange, (pictured left) the scarcity of water and its uneven, global distribution was behind the idea for the fund. "We believe that the current water market is undervalued. But scarcity creates value and so we expect the price of water to increase over time. Over the last few years, the water universe has achieved a performance of 400% and the expected future growth of this sustainable market remains attractive."

Aqua Global initially identifies stocks that belong to the water theme - such as utility, machinery and chemical sectors - that have at least 25% of their revenue generated from the water business. This leads to a universe of around 225 stocks. A liquidity filter is then applied to screen out stocks with low levels of transactions, according to Sorange, leaving an investable universe of approximately 60 stocks.

"We then apply both an ESG and a financial evaluation to the stocks before building the portfolio," he says. "Our extra-financial analysts score companies according to ESG criteria, while the financial evaluation rates stocks based on a quantitative assessment of growth and valuation ratios. If the combined rating is good the average stock weighting in the portfolio is around 3% but it can vary between 2% and 5%. When the rating is bad, the stock obtains a lower weighting or is excluded. We also use a multi-factor model to control risk and maximise alpha, called the APT."

Sorange adds: "With 44 stocks currently in the water fund, which derive on average more than 60% of their revenues from the water business, we have managed to have a similar volatility to the MSCI World index. And the price-earnings-to-growth ratio is almost three times cheaper than the MSCI World. The number of stocks in Aqua Global is not restricted. We need enough stocks to benefit from good diversification but not too many in order to make sure they are involved enough in the water theme.

"SRI is not just a filter for us, it drives the portfolio and the stocks' weight, in short we believe the ESG analysis is an alpha."

The water fund's net performance in 2007 was +1.5%, compared to the MSCI World's -1.6%. This has now driven IDEAM - which has a 10% market share in France - to expand into other markets, such as the UK, with a €40m Luxembourg SICAV fund.

"The fund already has a large distribution in the euro-zone, Sweden, Singapore and Hong Kong," says Jardin. "But with the UK being such a big SRI market, we had to include it too.

"A study conducted by the French SRI
research centre Novethic* showed that the French SRI market grew from just over €12.5bn in 2006 to €20bn last year, she says. "This growth was not only based on best-in-class approaches but also on thematic, mainly environmental, funds of which 13 were launched in 2007. The major difference between a euro-zone market and the UK or US is that the Anglo-Saxon markets tend to emphasise exclusions rather than a best-in-class framework. However, we feel that a best-in-class SRI portfolio enables us to have better industry diversification. It also allows us to encourage companies to become leaders in corporate responsibility, regardless of their sector.

"The level of risk is different for thematic funds and best-in-class approaches. With a best-in-class approach you have a benchmark and a relatively low tracking error because most of its risk is concentrated on the ESG criteria. But for the thematic funds we need to create a universe without having a benchmark, which can lead to a high tracking error. That is why thematic funds are popular with private banks and fund-of-fund managers whereas institutional investors - who typically allocate a very small part of their assets to higher tracking funds - have focussed on the core, best-in-class approach."

And, according to Jardin, more investors ask about SRI approaches. "Already, SRI products represent around 10-15% of total assets under management in Europe and we think the market will grow even further, on best-in-class as well as thematic approaches. We believe themes are not a fashion but a very structural trend."

As far as IDEAM's future plans are concerned, new asset classes are at the forefront for 2008.

"The current market trend is to move from equities, where the SRI market has so far been concentrated, to credit and bonds, as well as to new thematics within equities," says Jardin. "We will try to explore these new asset classes, which means we will have to diversify from our institutional core and equity approach."

But despite the market move towards different asset classes, Jardin says the credit crunch has not affected IDEAM very much.

"With regard to the type of process we already had, it has not significantly altered it or the way we look at the market," she notes. "If anything, it has reinforced our view that looking at the quality and value of companies is essential for the long-term, which has been demonstrated by the selection of stocks in our Eurocredit portfolio."

"However, one cannot expect a best-in-class or thematic equity fund to be completely decorrelated from the market in the short-term," Jardin adds. "But our conviction is that over the long-term all the SRI funds we manage will make a difference."

With its thematic offering, IDEAM has joined the likes of Pictet and Sustainable Asset Management (SAM) that also offer water funds. But Sorange believes IDEAM is different. "We differ from our competitors by taking ESG criteria into consideration," she says. "Novethic only recognised seven funds, including Aqua Global, doing this, out of the 20 funds it studied [in October 2007]. And with regard to performance, we are close to the best performers of 2007 while benefiting from better geographical diversification."

* ‘Novethic Barometer', January 2007

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