France’s FRR eyes EM shares, different Asia approaches

The French pension reserve fund aims to raise exposure to emerging market stocks and is open to different methods of accessing Asian assets.
France’s FRR eyes EM shares, different Asia approaches

France’s Fonds de Réserve pour les Retraites (FRR) plans to raise its exposure to emerging markets equity and is open to new ways of investing in Asia, although it has hit the limit on its allocation to return-seeking assets – namely, 55% of its €36 billion ($41 billion) portfolio.

Like other asset owners faced with today’s uncertain and volatile markets, the pension reserve fund currently is strongly focused on diversifying its portfolio.

However, its exposure to Asia is still relatively small.

So 'when should the fund invest more in emerging market stocks?' is a key question facing the state-funded agency, executive director Olivier Rousseau told AsianInvestor.

FRR’s emerging markets equity allocation has been broadly stable at 6% of total assets, but Rousseau expects it to rise over time. This will presumably mean redeploying money from elsewhere in the portfolio, given that the fund is at its ceiling on return-seeking assets, which includes equities.

“We’ve been tempted to [raise our emerging markets exposure in light of the recent drop in shares], but we have held off,” said Rousseau. “And so far, unfortunately, we’ve been right because the market has gone from bad to worse.”

Olivier Rousseau

Emerging market stock prices, as represented by the MSCI Emerging Markets Index, had fallen by 23% as of end-November since peaking on January 26, after a stellar 2017.  And as Rousseau pointed out, Asia accounts for some 70% of the index. 

He said the woes in emerging markets were mostly down to worries about China’s economic growth. If investors take the view that the Chinese authorities have decided to support the economy to push the growth rate back up, he added, “the rally in emerging markets will happen”.

Rousseau, who is also chair of FRR’s asset manager selection committee, said emerging market,  eurozone and Japanese stocks all looked attractive relative to US share prices.


At present FRR approaches global emerging market equities as a whole, Rousseau said, but it might at some point employ a more granular approach – or a sub-regional focus – in respect of countries like China.

“But we see no urgency to do that,” he noted. “We don’t have so much time available to do everything at the same time, and we don’t see this as a priority. It’s a possible evolution in the coming years.”

FRR, which must outsource all its investments to external managers, is also constrained by the fact that it cannot hold emerging market securities directly. Hence, it invests in emerging market bonds and stocks via mutual funds rather than mandates.

When it comes to developed market equities in Asia, FRR approaches Japan separately from the rest of the region. 

Its Japanese equity portfolio stands at around €700 million and is run by Capital International, JP Morgan Asset Management and Schroders. That said, the five-year mandate will expire at the end of next year, so FRR will be inviting asset managers to bid for the mandates in January.

Meanwhile, to obtain its developed markets equity exposure in Asia-Pacific ex-Japan, the French fund applies factor strategies and environmental, social and governance (ESG) investment criteria.

It does so via a €300 million smart-beta composite replication mandate, with ESG integration and carbon reduction applied by the manager.

FRR expects the manager to improve the ESG marks on the portfolio and reduce the mandate’s carbon footprint by a target of 50% compared with the normal index.

The upcoming December/January issue of AsianInvestor magazine will feature an extended interview with Olivier Rousseau.

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