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France’s ERAFP Has an Appetite for Equities, but Hold the Carbon

CEO Philippe Desfossés takes a long-term view toward investing, sustainability and proving that funded pensions can work in France.

France is a laggard when it comes to pensions, but Philippe Desfossés is determined to catch up. Founded in 2005 to provide supplemental pensions to civil servants, ERAFP has become the country’s largest funded pension plan, managing €20 billion ($21.9 billion) on behalf of 4.7 billion employees and retirees.

Desfossés, 56, can afford to take the long view: The collective defined contribution plan is a young scheme that will enjoy some €2 billion a year in net inflows for the next decade. Thanks to a recent liberalization allowing the fund to increase its equity exposure to 40 percent, up from 25 percent currently, the CEO is shunning low-­yielding government bonds in favor of multinational stocks, which can provide 2 percent dividend yields and benefit from an upturn in economic growth.

“It’s a no-brainer if you have time, if you can withstand the volatility,” he says. “I prefer Nestlé, Apple and Microsoft because I know these people can do business everywhere in the world.” He’s also looking to increase the fund’s real estate exposure, which can go as high as 10 percent under the recent liberalization, compared with 6 percent currently. The increased risk appetite is fitting for a man whose prized office memento is a mug bearing the slogan “No Guts, No Glory,” which he bought at a Drexel Burnham Lambert bankruptcy auction while serving as the French Treasury’s New York representative in the early 1990s.

The executive gets truly passionate when the topic turns to sustainability. The French government has issued bonds to help finance the state’s pay-as-you-go pension scheme, which he regards as reckless. Equally unrealistic, the CEO says, is the practice of many big U.S. pension funds of discounting their liabilities at rates of 7 percent or more. A onetime executive at French insurer AXA, Desfossés contends that the pension industry is going through a wrenching process similar to the insurance industry’s in the early 2000s, when companies realized they couldn’t count on investment gains alone to generate profits.

At ERAFP, sustainability means setting benefits at levels that can be delivered over the long term and incorporating environmental, social responsibility and corporate governance standards in its investment process. The fund has created a low-carbon equity portfolio that excludes the worst quartile of companies in each industrial sector, based on their carbon footprints. Says Desfossés, “It’s very important that ERAFP show it’s possible to run a funded pension scheme in France.”

This profile is one of 12 written for our 2015 European Investment Management Awards, which honors some of the best investors in the business. See also profiles of Lifetime Achievement Award winner Henrik Gade Jepsen, Centrica’s Chetan Ghosh, Lancashire County Pension Fund’s Michael Jensen, ABN AMRO's Geraldine Leegwater, Varma's Reima Rytsölä and AP4's Magnus Eriksson. Check back tomorrow to read about Linde’s Christoph Schlegel and Inarcassa’s Alfredo Granata.

Follow Tom Buerkle on Twitter at @tombuerkleVisit his blog, “The Globalist.”

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