Asset manager: BNP Paribas Asset Management

BNP Paribas Asset Management has reinforced its position as one of the leading institutions serving reserve managers worldwide during the past year. Its official institutions group has nurtured long-term relationships, offering a suite of services tailored to address both new and old challenges facing central banks. Yet a common root for its solid growth traces back to the relationships created by Fischer, Francis, Trees & Watts (FFT&W), the US investment management firm BNP Paribas acquired in 2006.

The acquisition bestowed BNP Paribas with improved expertise on mortgage-backed securities (MBS), a key alternative asset class for central banks seeking to reap higher yields while limiting their risk exposures. The ability to secure returns while managing the complex risks of the MBS market attracted international clients that remain attached to BNP Paribas to this day. Added to this is a strong focus on training – an offering the asset manager has been quick to adapt to the restrictions imposed by the Covid-19 pandemic, developing new online options.

The asset manager is also committed to educating central banks about the opportunities offered by environmental, social and governance (ESG) investment, offering a path to adopt these principles in the management of foreign exchange portfolios. This has contributed to boosting assets under management, resulting in BNP Paribas Asset Management being a top-five central bank asset manager by the end of 2019, according to Pension & Investments.

Work with the Czech National Bank showcases the way BNP Paribas has served the central banking community over the past few decades. 

“Our relationship goes a long time back, to the 1990s, when we worked with FFT&W,” says Jan Schmidt, executive director of risk management at the CNB. Both parties reinforced their link in November 2019 with a new $500 million MBS mandate. However, securing it was far from a foregone conclusion for the French group. The selection process was highly competitive. In total, more than a dozen asset managers competed for four mandates of the same size, among them major US firms. Schmidt says the investments ran by BNP Paribas were well-managed during the liquidity squeeze in March 2020.

Tailor-made for central banks

“It has been more than a year since the mandate was put in place, and BNP Paribas Asset Management has proved its top position when it comes to delivering both the financial performance and also fulfilling its other commitments in our contract,” says Schmidt.

Beyond a competitive return performance, one key advantage highlighted by BNP Paribas’s clients is its flexibility to address specific requests. 

“In this MBS mandate, we required the asset manager to provide us with customised reporting. We asked them to directly connect our accounting system with them,” says Schmidt.

“We spent almost a year working on the reporting lines, and BNP Paribas was the first out of these four managers to establish the reporting line, exactly according to what we required during the tender.”

BNP Paribas Asset Management has proved its top position when it comes to delivering both the financial performance and also fulfilling its other commitments in our contract

Jan Schmidt, Czech National Bank

This ability to cater to central banks’ specific needs stems from the group having official institutions embedded in its DNA, says the head of reserve management at a central bank with assets exceeding $250 billion.

“One indication of this is that the CEO of BNP Paribas Asset Management USA, Johanna Lasker, is also the head of official institutions,” the official tells Central Banking. “That really shows you the thinking and the sensitivity to official institutions.”

Other asset managers tend to serve their central bank clients through their in-country delegation.

“These departments serve several pension funds, maybe a sovereign wealth fund, but just one central bank. If, instead, you have an official institutions group such as BNP Paribas, which serves dozens of institutions like ours around the world, they are really aware of our needs as a central bank,” says the reserve manager at the central bank with assets of more than $250 billion.

“Sometimes, training might be helpful. On other occasions, you just need a staff member to come over and address a specific problem. They’re willing to show you what to do to get you educated.”

BNP Paribas’s commitment to the community is not only limited to larger, more profitable institutions. Take the Central Bank of Aruba, an institution serving a Dutch island in the Caribbean with barely more than 100,000 people. The initial connection between the two parties also stems from FFT&W, a relationship that has slowly thrived until now becoming full-fledged partners. 

“Even when they weren’t our official asset managers, they still came to the bank and made presentations,” says the president of the Central Bank of Aruba, Jeanette Semeleer.

“When we needed advice, we could count on them – so this relationship started on a non-formal basis a long time ago. I must say they invested time in it.” 

Now, the French institution manages a fixed income mandate in US dollars with a short duration of one to two years for the Caribbean central bank. It is a demanding portfolio that includes an income target with restrictive risk parameters. Managing public, scarce, key financial resources for the island, BNP Paribas constantly needs to balance returns and capital preservation with little margin for error.

Partly due to the low-yield environment that followed the financial crisis, the Caribbean central bank has invested in staff specialised in risk management over the past few years. This has allowed it to better communicate its risk guidelines to BNP Paribas, and securely reap higher returns by adding corporate bonds to its portfolio. In November 2020, the central bank’s reserve portfolio stood at almost Afl1.9 billion ($1.1 billion) in foreign exchange assets, according to official data. This was up from Afl1.4 billion in 2016.

“For us, it’s very important to trust these people – trust their knowledge and their judgement. Although we are a small central bank, we demand timely reports and they comply,” says Semeleer.

“They’re an extension of our operations, and we have very high standards in terms of risk management. So far, they have been able to comply, not only in terms of managing the risk and our risk appetite and understanding our needs, but also working within our budget.”

The track record BNP Paribas has built over the years also allowed it to weather the fallout from the Covid-19 pandemic. Despite the challenging environment, it was able to on-board new central bank mandates and work closely with central banks that were making significant asset allocation changes while working remotely.

During this challenging year, “clients demonstrated great flexibility and continued to make changes to their asset allocation by introducing new sectors to their reserve management programmes”, Lasker tells Central Banking.

Sustainable investment

BNP Paribas has also taken a leadership role in its approach towards sustainable investment after publishing its global sustainability strategy in 2019. This encompasses ESG integration and plenty of proprietary research. 

“We rate and score more than 12,000 corporate issuers on ESG performance, and we also have an ESG scoring framework on sovereigns,” says Jane Ambachtsheer, global head of sustainability at BNP Paribas Asset Management. 

“We have an aim to beat the benchmark on both ESG and carbon for those strategies that have an investable benchmark, and are in the process of integrating this into our client reporting.”

The reserve manager at the central bank with assets exceeding $250 billion says the French asset manager “has a huge database of companies on ESG compliance”, and adds: “Currently, we don’t have an ESG mandate with them, but the way they report to us on this field is very sophisticated.”

As with other investment areas, these ESG capabilities are tailored to every central bank client. The Central Bank of Aruba – based in a jurisdiction highly exposed to climate-change risks – is currently formulating its new strategy in this area, including climate-change policies and the greening of its investment portfolios.

“BNP Paribas has worked very closely with our team to help us understand the possibilities at our disposal,” says the central bank’s Semeleer. “It’s not easy, because we still need to maximise our investments. We need to carve out a green policy that would allow us to still make some money.” 

The Central Banking Awards were written by Christopher Jeffery, Daniel Hinge, Dan Hardie, Rachael King, Victor Mendez-Barreira, William Towning and Alice Shen