FRR cancels €2bn listed mandates in switch to illiquid assets; €3bn low carbon search reaches short-list

Move follows government approval of unlisted strategy move.

France’s €36bn pensions buffer fund, Fonds de Réserve pour les Retraites (FRR), has postponed three mandate searches for a total of approximately €2bn in listed assets reflecting a change of strategy after it was given permission by the French government at the end of last year to invest €2bn in French illiquid assets. These will include further allocations to private equity, loans to small and medium-sized businesses, real estate and infrastructure in order of asset size priority. The listed mandates that have been cancelled comprised three lots. One was for passive allocations to standard indices or optimized indices (such as smart beta approaches) in developed countries. A second pocket of assets that had been put up for request for proposal (RFP) was for a number of eurozone-focused quant managers with an outperformance target against a standard benchmark and an ex-ante tracking error of 3 % per annum maximum. The third lot was the same strategy investing more broadly in developed countries around the world.
In the second half of 2015, FRR was granted approval by the French government ministries that oversee it to invest €2bn in French private assets designed to boost economic growth. The fund had asked the government for permission to invest in illiquid investments to counter the current period of low interest rates and to take advantage of illiquidity premia. It means the fund increases its private market exposure to around 10% of assets. All of the new €2bn allocations should be made within a fixed two-year window.
Salwa Boussoukaya-Nasr, Chief Investment Officer at FRR, said the passive/quant mandates had been put on hold for further review while the fund considered its options for the deployment of the €2bn illiquid allocation. It held a supervisory board meeting last December to decide on that strategy and will refine the investment details at a strategic asset allocation review in April.
Boussoukaya-Nasr said: “We don’t have the capacity to do both operations at the same time so we have put the passive/quant strategies on hold to possibly revisit at a later date.”Under the new illiquid allocation, RI understands that FRR has already invested €200m into the FLI intermediate housing fund (FLI) managed by Société Nationale Immobilière, which aims to bridge the gap between renting and owning. It has also committed €145m to the NOVI private equity funds set up under the aegis of France’s Caisse des Dépôts et Consignations, sovereign wealth fund, to offer loans and equity to small companies in the country. A large portion of the proposed infrastructure allocation is also expected to come from investments in the low carbon energy transition.
The FRR is still pressing ahead with one of the biggest ever allocations of institutional capital to low carbon, ESG-related equity index strategies by putting €3bn into the market via a highly original set of collaborative discussion mandates.
Last year, the fund tendered for up to five fund managers for briefs that will see it switch its equity index strategy to an approach that aims to lower further its carbon footprint and take into account more systematically ESG criteria, thus necessitating the new mandates.
The mandates, which are understood to be at the short-list stage, are for a non-defined amount subject to negotiation between the fund and the selected managers.
FRR has already taken major steps to decarbonise its equity index portfolio. In September 2014, it allocated €1bn in assets to a mandate run by Amundi, the French fund manager, replicating the MSCI Global Low Carbon Leaders indices that were developed by FRR and Swedish state buffer fund Fjärde AP-fonden (AP4) together with Amundi and MSCI.
Last year, FRR also decarbonised a further €2.5bn in equity assets, comprising a €1.5bn smart beta eurozone index allocation, an €600m North American smart beta composite index allocation, and €300m in passive Asia Pacific ex Japan exposure, which it split between two indices, Low Carbon Leaders and a smart beta composite.