One step at a time

BNP Paribas Asset Management CEO Gilles Glicenstein is a Gallic advocate for U.S.-style federalism in money management. Like Norton Reamer at United Asset Management Corp. in the 1980s and executives at Mellon Financial Corp. in the '90s, Glicenstein believes that the best way to run an effective, high-performing asset management business is through a holding company of highly autonomous fund managers. He's making a strong case to his somewhat skeptical European counterparts.

Glicenstein's strategy of making small, targeted acquisitions and joint ventures, generating steady internal asset growth and using an open-architecture approach to distribution has proved successful. Last year assets, mostly held in fixed-income investments, increased E11 billion ($14.5 billion), to E163 billion. In the first half of 2004, they grew to E170 billion.

BNP PAM was created from the 1999 merger of Banque Nationale de Paris and Banque Paribas. Although the money manager's first acquisition, New York­

based institutional bond shop Fischer Francis Trees & Watts, has thus far proved lackluster, more recent deals and diversifications have paid off handsomely.

"Where we can add value, we will run money," says the soft-spoken Glicenstein, a graduate of the Ecole Nationale d'Administration and the Ministère de l'Economie, des Finances et de l'Industrie, two crucibles of the French elite. "Where we do not, we will choose competent external providers. We believe in open architecture."

In 2002, Glicenstein, a former head of strategy at BNP, opened BNP PAM's Parvest retail mutual fund platform to external managers, including Neuberger Berman and Sumitomo Corp. Parvest has grown assets from about E10 billion in 2002 to E15 billion today. And a joint venture with fund-of-hedge-funds manager Fauchier Partners has garnered E2 billion in assets since it was established in 2001.

Just last month BNP Paribas launched Cortal Consors Fund Management. The new firm will manage E12 billion and aims to offer multimanager funds and segregated portfolios.

Glicenstein's open-architecture ar-rangement contrasts markedly with the approach of almost all large European asset managers, who are linked to banks or insurers and use their distribution clout to sell in-house manufactured fund offers. Many firms remain leery of selling rivals' investment products.

BNP PAM kicks in 68 percent of the income of the wealth and asset management division of BNP Paribas, the biggest bank in the euro zone. The group includes a fund supermarket, a retail brokerage and a real estate management shop and contributes roughly 6 percent of the parent company's pretax profit.

Although it is a small part of BNP Paribas's banking empire, BNP PAM boasts above-average operating profit margins, about 35 percent, compared with an average of some 23 percent for the asset management industry.

BNP PAM employs 1,355 workers in 25 offices around the world. France represents 58 percent of the firm's asset base, the rest of Europe a further 20 percent, the Americas 11 percent, Asia 7 percent, Japan 2 percent and the Middle East and Africa 2 percent. The retail-institutional breakdown is roughly 50-50. Forty-four percent of the money manager's assets are in bonds, 26 percent in cash, 9 percent in alternative investments and structured products, 8 percent in balanced funds and just 13 percent in equities.

"I don't feel a particular need to be in equities for the sake of it. We want to be in attractive growth businesses that are profitable," says Glicenstein.

The E17.7 billion merger of Banque Nationale de Paris and Banque Paribas in 1999 joined two complementary asset management organizations. BNP was a retail powerhouse in France, with a thriving private bank; Paribas was a predominantly institutional firm with a strong presence in Italy, Spain and Portugal as well as its home market. Assets from the newly combined operation totaled E110 billion.

Glicenstein, who worked at the Ministère de l'Economie as an inspector before joining BNP in 1994, became CEO of BNP PAM shortly after the merger. From the start he believed that U.S.-style specialization would make its way to Europe. As a result, he set about acquiring specialist fund managers in areas where BNP PAM was weak.

He began by paying an undisclosed sum to buy a 70 percent stake in New York bond boutique Fischer Francis, which at the time had about E30 billion under management and enjoyed a reputation as a top-notch institutional bond shop.

But after Fischer Francis' CIO, Liaquat Ahamed, a 14-year veteran, left in 2002, Frank Russell Co. and other pension consulting firms downgraded the firm, and several pension fund clients decamped.

Most of the drain came in the core U.S. bond product. As a result, since the start of 2000, Fischer Francis' assets have grown a modest E5 billion, or 16 percent, during a surging bull market for bonds. Over the same period, the world's leading fixed-income manager, Newport Beach, California­based Pacific Investment Management Co., increased assets by 90 percent, to $392 billion.

Even so, Fischer Francis' performance has been solid. Since their inception in April 2000, its dollar-hedged global aggregate portfolios have outperformed the Lehman Brothers aggregate bond index by 30 basis points. In the 12 months ended in July, Fischer Francis bested the index by 87 basis points.

And the bond specialist remains highly respected in the investment community. Says Harald Lusser, head of multimanager investing at Munich's HVB Group, which counts Fischer Francis among its bond managers: "The risk management discipline of the firm is very good. It's a great shop full of very seasoned professionals."

BNP PAM has followed the UAM and Mellon model of hands-off ownership. Though BNP PAM owns 70 percent of the firm, Fischer Francis managers control more than 50 percent of the votes on the board.

Being owned by a large European bank has its advantages. The BNP connection has helped Fischer Francis win mandates to manage the foreign exchange reserves of central banks and multilateral lending institutions; these mandates now account for one third of Fischer Francis' assets.

And, in another move, Glicenstein has charged Andrew Craig, a former London-based Fischer Francis fund manager, with developing retail funds to sell through BNP PAM.

"We think there is a great opportunity to package Fischer Francis' skills into fund vehicles for a more retail audience," says Craig. BNP Paribas has a ready template to follow: When Pimco launched a European equivalent of its popular Total Return Fund, piggybacking it off parent company Allianz's Dresdner Bank distribution channel, it became the bestselling fund in Germany, raising more than E800 million in 2002.

If the Fischer Francis acquisition has been a little slow to pay dividends, BNP PAM scored an instant hit with its 2001 acquisitonof Paris-based currency specialist Overlay Asset Management, part of Glicenstein's strategy to grow the

alternative- and structured-investments unit. Helped by BNP PAM's distribution clout, assets at Overlay increased from E766 million in 2001 to E2 billion in June 2004.

To round out its alternatives business, BNP PAM entered a joint venture with Fauchier Partners, a London-based fund-of-hedge-funds manager set up in 1994. BNP PAM owns a 56 percent stake in the venture, BNP Paribas Fauchier Partners, which has garnered E1.7 billion in assets since it was launched in 2002.

In April, BNP PAM acquired the Javelin fund-of-hedge-funds business from Zurich Capital Markets, adding E534 million in assets.

Structured products, typically funds that carry capital guarantees or use portfolio insurance, have raised E13 billion for BNP PAM since 2002. Recently, Fischer Francis has proved especially successful in the collateralized debt obligation market. In the past 18 months, it structured two asset-backed CDOs, raising more than E700 million and becoming one of the largest players in this niche area.

Glicenstein hasn't finished rounding out BNP PAM's product lineup, though. Certainly, a U.S.-based equity manager would plug a gap. In the summer of 2002, the money manager reportedly came close to buying a minority stake in Boston-based Grantham, Mayo, Van Otterloo & Co., the renowned value manager run by Jeremy Grantham, but negotiations broke down.

Though Glicenstein won't comment on GMO, it is just the sort of firm BNP PAM favors: relatively small, with assets of $55 billion, and a strong performer. "We want diversified sources of alpha," Glicenstein says. "The best-performing funds are not $200 billion-in-assets conglomerates. They are smaller, more boutique-type firms. That's what we're looking for."