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France’s FRR ups vigilance on tax haven risk for investments, highlights green real estate

Fund revises strategic asset allocation and creates dynamic investment committee.

The €29bn ($40.5bn) French pensions reserve fund (FRR) says it is adopting a position of ‘vigilance’ on risks that the companies it invests in could be hit financially by government clampdowns on the use of tax havens. The announcement comes ahead of next week’s Berlin meeting of G20 ministers, where further discussion will take place on a crackdown of corporate use of offshore centres to avoid tax. French President Nicolas Sarkozy has called for the elimination of tax havens. US President Barack Obama has also prioritised the fight against tax loopholes, which are estimated to deprive the US of $100bn in lost revenues each year. In February this year, Swiss bank UBS was fined $780m for helping US high net worth clients avoid tax. In Berlin, Stephen Timms, UK financial secretary to the Treasury, is to lobby for the introduction of country-by-country tax reporting for multinationals, which would force them to reveal what tax or profits they make in each country they operate in. The proposal is supported by some of the world’s biggest NGOs who say current multinational tax practices can deny developing countries billions of dollars in tax revenues. The €260bn Norwegian Government Pension Fund has said it too will examine the issue of the potential risk of new rules on tax haven use on its investments, indicating that nationalfunds are particularly sensitive to the political debate taking place. Raoul Briet, president of the FRR supervisory board, said the fund was conscious that companies it invests in, notably in Europe, could be impacted by any decisions taken by the G20. The French fund also announced that it was progressing with work to analyse the impact of environmental issues on its strategic investment allocation. The fund is already tendering for two direct real estate mandates of €500m each where the fund manager’s sustainability credibility, along with its organisational strength and financial solidity, make up 35-45% of the hiring criteria. Submissions for the mandates must be made before June 26th. In a bid to respond more rapidly to economic events, the FRR also announced that it was introducing a dynamic asset allocation approach overseen by a new strategic investment committee. The fund made losses of 24.9% in 2008 wiping out most of its returns since inception in 2004. By the end of May this year, the fund had made annualised returns of just 1% over five years. A revised asset allocation strategy will reduce equity exposure to 45% with a further 10% allocated to risk capital split evenly between property (5%) and commodities (5%). The dynamic asset allocation overlay will allow the fund to shift these risk assets between 40-

60% of the allocation depending on market conditions. The fund has also raised its fixed income exposure to 25% in fixed rate bonds and 20% in inflation linked bonds. In 2007, before the current crisis, the fund had almost 65% in equities and 27% in bonds.The FRR, which was created to cover future payments in the French public pensions system, will start drawing down its assets from 2020 at a rate of €2.3bn per annum until 2040. The fund said it aimed to reach €83bn based on current return projections of 6.3% per annum.