France’s biggest pension fund will in January invite asset managers to bid to run its €700 million ($792 million) Japanese equity portfolio. Fonds de Reserve pour les Retraites (FRR), also known as the pension reserve fund, is also likely to raise its allocation to emerging markets, the bulk of which is invested in Asia. 

The €36 billion fund employs three firms to run active Japanese equity mandates, whose five-year tenure will expire at the end of 2019, said Olivier Rousseau, FRR’s executive director and chairman of the asset manager selection committeeThe current managers are Capital International, JP Morgan Asset Management and Schroders.

“We will renew the mandates with a new RFP [request for proposal] in January,” he told AsianInvestor. “The process will last the whole of 2019, so we will award the mandates to new managers at the end of the year. They may be the same or different ones.”

FRR has been happy with the performance of the current mandates, added Rousseau, but he declined to comment further.

Olivier Rousseau

Meanwhile, over time the fund expects to increase its allocation to emerging market equities, which has been stable at 6% of AUM for some years. But it has not decided on the timing of such a move as yet.

“We don’t single out Asia in our GEM [global emerging market] fund investments,” said Rousseau, “but of course Asia accounts for 70% of the benchmark.” It also has €130 million in a frontier markets fund run by Schroders.

“The main story for us at the moment is: when is it time to invest more in emerging markets?" said Rousseau. "We’ve been tempted to do it but we have held off, and so far, unfortunately we’ve been right because the market has gone from bad to worse. 

The MSCI Emerging Market Index has plunged 24% since peaking on January 26 after a sustained two-year rally.

For FRR, this is likely mostly the result of worries about economic growth in China. When the Chinese authorities are seen as making a decision to support the economy to push the growth rate back up, said Rousseau, then there will be an emerging-market rally.

As to how FRR allocates to EMs, it does so entirely via mutual funds, as the fund is not permitted to hold EM securities directly (including through mandates).

The processes to open local-currency accounts in all the EM juridictions pose operational and legal issues for FRR, with huge administrative constraint, explained Rousseau. “It is also difficult for us to monitor the delivery-versus-payment risk in some emerging countries.”

FRR’s EM equity portfolio forms part of its overall risk asset allocation of 55%. Of this, 8% is in emerging market debt, also entirely via mutual funds. EM equities represent 6%, developed market equities 36% and developed market high-yield debt (listed and unlisted) around 5%.

The other 45% (known as ‘hedging assets’) comprises euro investment-grade corporate bonds (17%), US investment-grade corporate bonds (13%) and liability cashflow matching and cash (15%).