Fund & Asset Manager Rating Group

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1 Managed by La Française des Placements Full Rating Report Balanced Funds / France Key Rating Drivers Balanced Fund: is a balanced fund managed by La Française des Placements (LFP). Its investment process is committee-driven and well defined, based on LFP s top-down approach. The fund s target is to outperform a composite benchmark, comprised of 50% Stoxx 600 and 50% EuroMTS. Medium Term/Fundamental Philosophy: The fund is better adapted to markets that are driven by fundamentals than to markets affected by sentiment and short-term reversion movements. The ability to provide asymmetry is somewhat hampered by the limited capacity to quickly adjust market exposure, relative to certain peers, and a fund selection universe that is biased towards traditional long-only funds. Lipper Leaders: Consistent Return Rating 3-Year 5-year 10-Year For more information, see Fund Features Asset management company La Française des Placements Portfolio managers Joël Konop Inception date 5 April 2001 Size EUR97.8m (October 2011) Lipper classification Mixed asset EUR bal - Strategy Reference index global Long-only balanced FoF 50% DJ Stoxx 600 net of div.; 50% Euro MTS Global (closing) Share classes Primary: Class R, FR Domicile France Analysts François Vattement francois.vattement@fitchratings.com Aymeric Poizot, CFA, CAIA aymeric.poizot@fitchratings.com Committee Driven: Investment process organised around sequential committees involving other teams and top management. The selling decision is fundamental, without formal triggers, watch lists or alerts. Portfolio monitoring is based on numerous proprietary tools, essentially statistical. Leveraging Broader Investment Resources: The fund draws on the resources and experience of a six-person core asset allocation team, which benefits from the knowledge of La LFP s equity, bonds, credit and emerging markets teams. The core asset allocation team has a fundamental/fund selection-oriented background. Well Established Manager: Owned by La Française AM Group (600 staff and EUR33bn assets under management AuM), LFP (rated M2 by Fitch), is profitable; its size allows it to cover most asset classes while preserving its organisational flexibility. The organisation s staff levels have remained stable over the last two years. Appropriate Operational Set-up: The operational set-up passed Fitch Ratings operational assessment (see page 5). The investment strategy is fairly simple, implemented with funds, trackers, and futures. The operational framework is appropriate, with standard terms and third parties. Good Long-Term Track Record: Launched in 2001, has a Lipper rating of 5 over ten years. On three- and five-year time horizons, the Lipper ratings are lower, at 3 and 4 respectively. Underperformance in 2011 offsets the gains made in 2009 and For this reason, Fitch has not applied a quantitative uplift to the end rating. Fund Performance and Assets Assets (RHS) Category (LHS) R (LHS) 50% DJ Stoxx 600/50% Euro MTS global (LHS) (EURm) 150 Apr 01 May 03 Jun 05 Jul 07 Aug 09 Sep 11 Source: Lipper

2 Figure 1 Fund Statistics Calendar returns (%) Year Fund Reference index a Lipper category 2011 b Statistics (1 year) Volatility (%) 8.2 Sharpe ratio -1.0 Max. drawdown (peak-totrough, weekly data points) (%) a Reference index is 50% Euro MTS Global /50% DJ Stoxx 600 div.reinv b As of 30 October 2011 Source: Lipper Qualitative Assessment Investment Process Investment Philosophy aims to outperform its benchmark (50% DJ Stoxx % Euro MTS Global) with a volatility target of 10%, by discretionarily adjusting its equity exposure from 0% to 65% and diversifying its asset allocation across asset classes (eg high yield or emerging markets), using funds (including trackers). Occasionally, the fund may be exposed to individual securities when implementing a specific conviction/idea (as has recently been the case with a Portuguese bond). The importance of risk management has grown since 2008, resulting in the recruitment of a quantitative team member, in charge of calibrating risks and developing tools for the portfolio managers (PMs). The investment process, which is disciplined and largely relies on structural/macro views, is challenged by the current erratic markets. To achieve greater return dissymmetry, the investment approach, which is very directional, would need to evolve with regards the breadth of fund selection (eg long short, market neutral funds) as well as more reactive allocations. Fitch stresses the challenges of managing the risk budget in flexible products, notably in the current market environment which requires frequent tactical adjustments. The best performers in this field generally have dedicated resources, eg a quantitative allocation model or a shortterm investor/trader within the team, able to quickly react to news flows and market sentiment by leveraging or deleveraging portfolios in a prompt and efficient manner. Figure 2 Asset Allocation (As of June 2011) Trackers 2.2% Direct issues 2.6% External funds 33.1% Cash 1% Futures, forwards, swaps 0.2% Inhouse funds 60.7% Research The process benefits from broad inputs from LFP. The asset allocation team which attends company-wide investment committees (asset allocation, fixed income, equities, credit, emerging markets and absolute return) sources ideas from in-house committees, external conferences and sell-side analysts. The firm s top-down views are formalised through two sequential committees. The Asset Allocation committee defines exposure brackets and models portfolios, while the Strategic Investment committee (CIS) which comprises La Française AM Group s Chairman, LFP s CEO, and the two CIOs validates these choices. The team focuses on asset allocation rather than actual fund picking, and often favours inhouse funds, also for transparency purpose. The fund also invests in trackers, and external funds for certain asset classes (emerging markets, mid-caps equities). Fund selection is performed using Lipper for track-records, complemented by standard qualitative due diligence. Decision Making and Portfolio Construction The decision making process is very disciplined, involving several committees. A monthly financial committee is held, during which the company s convictions are elaborated, following which, portfolio construction can occur. A weekly asset allocation committee (including CIS) validates the top-down positioning. Related Criteria Fund Quality Ratings Criteria, September 2011 During the asset allocation committee, a risk budget is determined and an allocation range (minimum/maximum) is formalised. Tactical adjustments are performed using futures (mainly on equity); these are largely part of the top-down process, as opposed to being implemented on the desk as a macro overlay. The team selects asset classes whose risk/reward is most attractive. The position sizing is based on contribution to risk and extreme risk scenarios. The sell discipline at asset class and fund level is judgmental and could benefit from a more systematic approach (eg watch lists, performance drift). Technical analysis is used incrementally to improve tactical allocation reactivity. The fund does not employ systematic 2

3 downside protection techniques (stop losses, option/tail risk protection). Turnover for the 12 months from September 10 to September 11 was 194%. Figure 3 Equity Exposure Over Time From Sep 2006 to Sep 2011 (%) Sep 06 Dec 07 Mar 09 Jun 10 Sep 11 Portfolio Monitoring Portfolio monitoring is performed on an ongoing basis and benefits from the inputs of the quantitative analyst (who is also involved in daily portfolio management). Monitoring relies on several models and internally developed tools, interfaced with Excel. A multifactor VaR model allows the separation of market risk from specific risks and shows how VaR is influenced by market stresses and historic stresses (negative and positive) at the portfolio and asset class level. Numerous back tests are also performed. The tools allow for the full customisation of indicators selection/monitoring (view by asset class, geographic area, instrument type) and the main indicators are automatically stored in Light Trade. Risk and performance reports (including current risk budget consumption, various metrics and stress tests, alpha contributions, betas, correlations, rolling alpha, alpha versus beta, back tests results) are generated on a daily and weekly basis. Independently, a financial engineering team provides daily risk reports (VaR, exposures, sensitivities, correlations) to the PMs. The underlying funds transparency is total for in-house funds and reasonably high otherwise. External funds are not examined line-by-line, though the key parameters, broader sector allocation and main exposures are analysed. A monthly committee reviews all underlying funds with regard to their respective peer groups. Underlying fund market sensitivities (duration or equity beta) are stored for further monitoring. Operational Front-Office Workflows The operational setup is relatively simple, given that implementation is essentially via funds. Portfolio managers input their orders in the central system (Light Trade) and these are then straight-through processed. There are limited added-value functionalities such as automated allocation, order grouping and hedge pre-calculation. Futures are traded electronically; other workflows (NAV validation, P&L, cash management, subscription/redemptions) are all handled in Light Trade. Excel is used for position monitoring and the impact on risk budgets can be simulated. Constraints are monitored by the middle-office (19 staff) but there is no full pre-trade control (except data input error alerts). However, in the case of funds of funds, transactions can be amended or cancelled up until the instruction is sent. Resources Staffing Joel Konop was Head of Asset Allocation at the former LFP Investissements. He has 18 years of experience in investment management. The investment team encompasses six portfolio managers/analysts, each having a specific expertise: Joel Konop for global asset allocation and team management, Chantal Laurent for fund selection and co-management of the team and other members specialised in US and European equities, European equities, global bonds, and quantitative analysis. The recruitment of a new team member, who will focus on fixed income/credit, is in progress. The whole team manages approximately 50 funds/mandates (including many clones). Fitch notes positively the close involvement of senior management, which participates in the weekly CIS meetings and validates asset allocation decisions. The asset allocation team benefits from the views/inputs of 40 investment professionals across asset classes, while a financial engineering team (six staff) provides daily risk reports, as well as stress and back tests. The team is comprised solely of fundamental managers and could 3

4 Figure 4 Staffing, La Française Des Placements Functions No. Balanced team 6 Other investment 37 professionals Strategists/economists a 3 Support/financial 8 engineering Market risk control 6 Figure 5 AuM Breakdown by Client Type As of December 2010 Financial institutions 3% Insurance (third party) 13% Others 7% Insurance (group) 35% Institutions (third party) 14% Distributors (including group) 28% Figure 6 Breakdown of AuM by Asset Class (Excl. mandates). As of December 2010 Equities 11% FoHF 14% Fixed income 20% Convertibles 3% Money markets 27% Balanced 25% benefit from the presence of a more short-term oriented resource, which could bring more reactivity to the desk and help navigate technically driven range trading markets. Technology Overall, the IT environment is satisfactory, matching the needs of the fund (for more details, see Fitch s asset manager rating report). All data is centralised in LFP s proprietary position keeping tool, Light Trade. It is well adapted and has been enhanced with plug-in controls and increased automation during the past year. It is complemented by ad-hoc vendor solutions for risk management and reconciliations. Excel add-ons have also been developed for position monitoring, and the impact of orders on risk budget can be simulated. Asset Manager Ownership and Financial Conditions La Française AM is an asset management group, 80% owned by Credit Mutuel Nord Europe, resulting from the 2009 merger of La Francaise des Placements, an independent company, and UFG-IM. LFP is the group s subsidiary for security management and is rated M2 by Fitch; it comprises equity, fixed income, emerging markets, convertibles, balanced/absolute return products, directly invested in securities or via funds of funds. For more information on LFP s financial condition, refer to LFP s rating report, dated 12 September 2011 and available at Client Base The business is fairly diversified in terms of asset classes managed, as shown in Figure 7, even if the client base is approximately 100% French. The 10 largest clients of LFP account for 51% of assets. The fund s client base includes insurance (73%) and banks (9%), the rest being split between distributors, retirement schemes and retail/private clients. Institutional Experience & Market Presence Created in 2000, La Française des Placements has gained a sound reputation among French institutional investors, notably with niche products. UFG IM was created in 2006, although it benefits from more than two decades of experience (as Union Française de Gestion, founded in 1975, Multifonds in 1978, and Alteram in 2001). Both companies have weathered the recent market crisis quite well ( ). The new group has a presence in most asset classes and maintains organisational flexibility, thanks to its size. Multi-asset/balanced investments account for 25% of total AuM (EUR6.4bn, of which 19% is implemented under segregated mandates, 36% in pooled funds, and 45% in dedicated funds). Stability Following the merger of La Française des Placements and UFG IM at the end of 2009, responsibilities have been fairly distributed between both senior management teams. The headcount has remained stable (no departures) and recruitments are in progress (mainly to support the company's international growth). 4

5 Operational Assessment Pass Attention required x Fail Service providers & asset segregation Custodian BNP Paribas Security Services (BPSS), third largest European custodian, AA- /Rating Watch Negative/ F1+ Segregation of assets Assets are segregated as per regulation Administrator BPFS (BNP Paribas Group) Auditors Deloitte & Associes Stability in service Unchanged since the inception of the fund providers Others Clearers: Newedge (joint venture with equal ownership by Crédit Agricole CIB and Société Générale) and BNP Regulation & governance Regulated vehicle French FCP UCITS compliant Governance No fund board as per regulation; BPSS as trustee Control framework Internal control (seven staff), risk management (six staff) reporting to Chief Executive officer and Chairman of La Française AM Group respectively Valuation & pricing Pricing responsibility Undertaken by BPFS and validated by manager, as per regulation Pricing policy Underlying assets are funds and futures Back-office reconciliations Source: Fitch and prices come from usual data vendors Holdings and cash are reconciled on a daily basis between the manager and the administrator/custodian Fund terms Liquidity management Daily subscription and redemptions with T+1 settlement underlying assets have daily liquidity Fee structure Conflicts of interest Management of conflicts of interest Alignment of interests Management fees of 1.75% (1.30% for I class) and performance fees of 20% above benchmark (50% DJ Stoxx 600/50% Euro MTS Global) with a cap of 2.392%, performance net of tax Part of a banking group banking affiliate with no investment banking activity Saving scheme for employees, invested in La Française des Placement s funds Disclosure & transparency Clear strategy Clear investment strategy, properly representation described in marketing documentation Level of disclosure Transparency to investors in the form of a detailed monthly fund factsheet (public) and detailed reporting (for investors only). Detailed market newsletter 5

6 Important Notice A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the fund advisor and its agents in connection with the distribution of the fund. Investors should review the prospectus and/or legal information, which Fitch understands includes, inter alia, the jurisdictions in which the fund is registered for sale. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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