When French Investment funds leave CAC 40 Index..

When French funds leave CAC 40 stocks…

Since 2012, the total investment of French Funds in CAC 40 companies’ shares decreased by 23.5% from 34 % to 26 % of the total stock held by Investment funds. In this context, we can legitimately ask why French funds are no longer attracted by the biggest French capitalizations while their foreign counterparts are increasing their holdings.

According to Jocelyn Jovène and Jean François Bay, from MorningStar France and quoted by Les Echos in the issue of Tuesday, October 22, the main reason for the drop in investments of the French institutional investors in CAC 40 shares is explained by the anticipation of the new European Solvency regulation “Solvency 2”1 which should be effective from January 2014 and that limits the insurers’ participation in shares. It is to recall that in France, insurers represent the majority of the institutional investors. As far as French individual investors are concerned, they have been clapping out to increase their investments in CAC 40 shares, deterred by the consecutive financial crisis, and a lack of readability surrounding fiscal reforms. In addition, the fiscal hardening on dividends and capital gains has discouraged them from heading into the French stock market.

This step back of French investors highlights at the same time a gain of greater power by foreign investors, now holding almost 50 % of CAC 40 Index (the highest level since 2006). Foreign investors, dominated by Anglo-Saxon funds, and specifically American Funds (reflected by the holding of Capital World Investors, Vanguard Group and also Blackrock, holding jointly more than 16.5 USD billion in the form of shares) have increased their participation and now account for more than 33 % of the total participations held by funds in CAC 40 Index, higher than their representation observed in the FTSE (32.6%) at the end of October. This trend is also observed in the other main European Indexes, highlighting the new interest of foreign funds in European stocks.

French funds then seem to be the only ones not taking profit of the resurgence of the European equity markets fueled by the reversal of the bond rates and the higher risk on European bonds increased by the sovereign debt crisis2. According to some analysts, the move towards stock markets should continue, but at a slower pace than the one experienced during the second semester of 2013. Nevertheless, main indexes are at their highest level since 2007,benefiting from the announcement of the FED not to reduce its quantitative easing policy for the coming months. This decision coming from overseas has been criticized by most analysts who fear a negative signal over the long term4, reflecting the difficulties of the US economy to fully recover.

This assumption of powers of American Funds over CAC 40 Index will undoubtedly have an influence over Corporate Governance in the biggest French companies over the coming years. Lately in August 2013, ECGS already pointed out this issue, after the American activist fund TCI directly expressed its view against the French State interests, within an open letter addressed to EADS’s CEO Tom Enders requesting the sale of EADS’s 46 % stake in the French aerospace Dassault Aviation (see Activist Fund TCI challenges EADS!). American funds no longer hesitate to openly state their views even when those are directly addressed to the French State.

But American funds do not represent the totality of the foreign funds holdings in CAC 40, and this step back of French funds also benefits to more exotic sources of investments. Indeed, the holdings of the Norwegian fund (NBIM) now reach USD 28 billion in the form of shares being the first foreign holder of the CAC 40 Index and even “the first fund shareholder5 of 2/3 of the companies of the Index!” says Olivier de Bellescize from Facset to Les Echos. In addition, the sovereign Qatar fund, (Qatar Investment Authority), discreet and silent, regularly increases its holdings in French companies, with a general strategy not to overpass the threshold of 5%, except in some companies such as Vinci or Lagardère where it holds more significant holdings. 

Finally, we are not worried about French funds’ loss of influence over the biggest French companies, but we want to put forward the fact that they seem to be the only ones not to take advantages of a current undervalued market potentially generator of shareholder value.  In addition, by staying aside of the French stock market they indirectly increase the risk of seeing the development of a new pressure coming from speculative funds not acting in the interest of long term shareholders. Worse, this situation could trigger the potential implementation of some “poor” corporate governance standards imported from overseas…

                                                                                                                                                                                                                                                                                                                                                                                 by Olivier Courade

London, October 24, 2013