1

14:00/15:15- Panel 3

Challenges of Pension Funds and Challenges of Pension Funds and Long Term Investments : What Liability Long Term Investments : What Liability

Driven Investment can Bring ?Driven Investment can Bring ?

Challenges of Pension Funds and Challenges of Pension Funds and Long Term Investments : What Liability Long Term Investments : What Liability

Driven Investment can Bring ?Driven Investment can Bring ?

2

Challenges of Pension Funds and Long Challenges of Pension Funds and Long Term Investments: What Liability Driven Term Investments: What Liability Driven

Investment can Bring ?Investment can Bring ?

Jean-François BOULIER, Head of Euro Fixed Income and Credit, Crédit Agricole Asset Management Paris

Thierry MEQUILLET, Chief Executive Officer Asia,

Crédit Agricole Asset Management

Mumbai, Wednesday, May 16, 2007

3

SummarySummary

I – What is CAAM ?

II – What a new concept, LDI, can bring to an old problem, managing pension funds ?

4

What is CAAM ?What is CAAM ?

Thierry MEQUILLET Thierry MEQUILLET

Chief Executive Officer, Chief Executive Officer,

CCrédit rédit Agricole Asset Management Hong Kong BranchAgricole Asset Management Hong Kong Branch

5

In the Top 10 within Continental Europe (1) and N° 1 in France in mutual funds (2) with € 534.8 bn AUM as at 31 December 2006

8 investment centres worldwide

2,137 employees including 546 investment professionals

Quick glance at Quick glance at Crédit Agricole Asset Management GroupCrédit Agricole Asset Management Group

Data as at 31/12/2006 - Sources:(1) IPE - Top 400 European Asset Management Leaders, data as at December 2005, issued in June 2006(2) Europerformance - Investment funds, December 2006

Breakdown by type of clients

67%

33%

Institutions & Corporates

Retail networks

6

A multi-specialist in asset managementA multi-specialist in asset management

CAAM Real Estate

Real Estate

CAAM Real Estate

Real Estate

IDEAM

SRI

IDEAM

SRI

CPR-AM

Quantitativemanagement

CPR-AM

Quantitativemanagement

Systeia

Alternative management

Systeia

Alternative management

CAAM AI

AlternativeMulti-

management

CAAM AI

AlternativeMulti-

management

Crédit Agricole Asset Management *Crédit Agricole Asset Management *

CASAM

Structuredmanagement

CASAM

Structuredmanagement

FundamentalActive

Investments

FundamentalActive

Investments

Specialised InvestmentsSpecialised Investments

1.4 2.80.8 19.744 16

* 65% of CAAM SGR AUM in Italy

Source CAAM

€ 534.8 bn AUM € 534.8 bn AUM

450.1

AUM in bn euro

at 31 December 2006

7

Breakdown by asset classBreakdown by asset class

EUR 534.8 bn AUM as at 31.12.2006

Breakdown by asset class: (in bn euros)

8

Multi-faceted expertiseMulti-faceted expertise

Euro money market

Euro government and corporate

bonds Global bonds

Emerging countries bonds

IndexedMid & small capsLarge capsEmerging countriesSectorThematic

Quantitative funds (1)

SRI (2) Alternative funds (3)

Funds of hedge funds (4)

Structured funds (5)

Absolute Return Multi-management

Fixed Income

Specialisedfunds

Balancedfunds

Core-SatelliteEquity

management

Via CPR-AM (1), IDEAM (2), Systeia Capital Management (3), Crédit Agricole Asset Management Alternative Investments (4), Crédit Agricole Structured Asset management - a 50% CAAM-Calyon JV - (5)

9

A dynamic international developmentA dynamic international development

Europe: € 32.5 bn

Asia/Pacific: € 13.8 bn

Rest of the world: € 6.2 bn

International breakdown by geographical areas (excluding France & Italy):

Source: CAAM

Breakdown : France/Italy/International

Breakdown: International € 52.5 bn(excluding Italy)

€ 534.8 bn AUM as at 31.12.2006

10

A « multi-local » approachA « multi-local » approach

8 investment centres, in close contact with the markets

Paris Hong Kong

London Singapore

Milan Tokyo

Madrid Seoul

An extensive sales presence worldwide

11

Focus on CAAM’s development in Asia - PacificFocus on CAAM’s development in Asia - Pacific

NACF-CA Investment Trust Management Company Joint Venture in Seoul between NACF (60%) and CAAM (40%)

Since January 2003

Number of staff: 50+

CAAM Japan Limited

Since 1986

Number of staff: 100+

Beijing representative officeSince December 2006

CAAM Hong Kong Limited Since 1982

Number of staff: 60

Sydney representative office

Since January 2007

CAAM Singapore Limited

Since 1989

Number of staff: 30

more than 20 years history,

more than 200 staff in the region.

12

CAAM : a pioneer in Indian investmentCAAM : a pioneer in Indian investment

CAAM Asia has more than 15 years of India investment experience

CAAM Asia created third India fund in 1990, the Himalaya Fund

Launch of CA Funds India in January 2006, which aims to achieve long-term capital growth by investing in a concentrated selection of listed equity securities of Indian companies. This Luxembourg-domiciled sub-fund is managed by CAAM Hong Kong Ltd. with more than $ 400 mn AUM at the end of March 2007

The investment team benefits from in-depth and long-standing knowledge of some of India’s most important companies

13

What a new concept, LDI, can What a new concept, LDI, can bring to an old problem, bring to an old problem,

managing pension funds ?managing pension funds ?

Jean-François BOULIERJean-François BOULIER

Head of Euro Fixed Income & Credit, Head of Euro Fixed Income & Credit,

CCrédit rédit Agricole Asset Management ParisAgricole Asset Management Paris

14

Market overview – OECD pension scheme assetsMarket overview – OECD pension scheme assets

Global pension asset size (US$bn) (Source: Watson Wyatt 2007)

15

Asset Allocation has been evolving recentlyAsset Allocation has been evolving recently

Pension funds allocation shows signs of becoming more defensive but at a slow pace (apart from the UK)

16

11 New paradigm New paradigm in asset allocationin asset allocation

17

A Challenging accounting and regulatory environment !A Challenging accounting and regulatory environment !

Increase the return of their portfolio in a low return environment

Control the sources of volatility of their balance sheet and statements resulting from the application of new accounting (IAS/IFRS) and regulatory rules (Solvency II)

The answer: Liability-Driven Investment (LDI)

Pension funds and Insurers are facing two apparently contradictory issues

These requirements result in a need to

manage Asset/Liability equilibrium

&

seek for more return on asset portfolio

18

What is behind LDI : some stylised factsWhat is behind LDI : some stylised facts

Typical Pension Fund Allocation

Equities30%

Bonds 45%

Absolute performance

10%Real estate

15%

Portfolio Risk Contribution (bp)

0 100 200 300 400 500 600 700 800

Equities

Absoluteperformance

Real estate

Active Bonds

A/L Risk Contribution (bp)

0 100 200 300 400 500 600 700 800

Interest rate

ActuarialIncertainty

Where does your risk come from ?

Source: CAAM

Volatility/DurationInterest Rate 0.8%Equities 15.0%Absolute performance 5.0%Real estate 10.0%Bond benchmark 6 yLiabilities 15 yActuarial uncertainty 1 y

19

Basically, LDI raises QUESTIONS & requires DECISIONSBasically, LDI raises QUESTIONS & requires DECISIONS

Interest rate risk

Inflation risk

Mortality risk

Asset risk

Current Asset Liability Gap increases for a decrease in rates

A rise in Inflation increases liabilities

Increased life expectancy of 1 year for every 4 years extends the duration of liabilities

Excess volatility of equity, concentration risk…

Duration hedging protects fund solvency and sponsor equity

Inflation linked bonds or swap overlays protects against inflation rise

Adjusting the required duration hedge helps mitigating the gap

New Asset Allocation with more downside protection

Making DecisionsAddressing Risks

20

Strategic Allocation: old versus new paradigmStrategic Allocation: old versus new paradigm

Absolute Risk

Exp

ecte

d

retu

rn

Asset only efficient Frontier

A/L PortfolioEnvelope of risk around the Liability Matching Portfolio

Typical asset allocation

Total Return Liability Driven Investing

Model Efficient Frontier/ CAPM Asset Liability Management

Objective High Long term returns High and stable surplus value

Risk Measure Volatility of returns Volatility of funding ratio

Risk Free Asset Cash Liability Matching PTF (fixed income)

Correlation Maintain low correlation of assets Assets should be positively correlated with PV of plan liabilities

Rationale On the run, assets will outperform Asset objectives should firstly be linked liabilities and minimise plan costs to pension liabilities

21

22 LDI according CAAMLDI according CAAM

22

LDI means: “Strategic Asset Allocation decision”LDI means: “Strategic Asset Allocation decision”

Matching liabilities

Optimising the asset return

Meeting the fund’s objectives

High Return Slice

Matching Slice

Liabilities

Synthetic hedge of the liability benchmark

High Return Slice

Matching Slice

Liabilities

liability benchmark

Fixed income management

Hedging duration & inflation risks

High return asset classes: Equity, Private

Equity, Hedge Funds

Active management on each asset class

The matching block The high return block

23

Our convictions : Active management of liability matchingOur convictions : Active management of liability matching

CAAM’s approachTraditional approaches

Duration matchingCash-flow matching Risk Matching

Principle

Analysis of liabilities cash flows shape

Construction of a liability benchmark having the same risk profile as the liability's

The liability benchmark aims to minimise the A/L volatility!

Not very flexible

structures

Principle : define asset allocation which duration best replicates the liabilities duration

Principle : define asset allocation which cash flows match exactly liabilities’ cash flows

alternative

Sensibilités / Piliers nominaux

1.98

3.68

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

EUR1M

EUR3M

EUR6M

EUR1Y

EUR2Y

EUR3Y

EUR4Y

EUR5Y

EUR7Y

EUR9Y

EUR10Y

EUR15Y

EUR20Y

EUR30Y

EUR50Y

Liabilities Assets

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

CF_liabilities CF_asset

3.033.03

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

EUR1M

EUR3M

EUR6M

EUR1Y

EUR2Y

EUR3Y

EUR4Y

EUR5Y

EUR7Y

EUR9Y

EUR10Y

EUR15Y

EUR20Y

EUR30Y

EUR50Y

Liabilities Assets

24

Our convictions : Alpha as a plusOur convictions : Alpha as a plus

Structured products

Structured credit (CDOs, CLOs..)Structured bonds……

Alternative Beta

Volatility

Commodities

CAT bonds…

Asset Allocation Analysis

Objectives’ assessmentStrategic asset allocationDynamic management (CPPI…)

Management under specific constraints

Specific accounting budgetsRegulatory guidelinesRestricted investmentsCapital gainsTax issues…

Alpha generation

Niche productsPortable alphaHigh alpha expertises…

Alternative investments

Real estatePrivate EquityHedge funds…

CAAM Group: a bundle of expertise for long term investors

25

LDI according to CAAM : Our approachLDI according to CAAM : Our approachE

xpec

ted

ou

tper

form

ance

Risk budget accepted by the investor

2

3

Liability matching risk budget

Investor’s

liabilities

Definition of a

Liability benchmark

1

Definition of a

Liability matching benchmark

Definition of an

Optimal LDI portfolio

Overall risk budget

A B+

Liability

matching

Booster

26

LDI in CAAM = combining ALM and Asset ManagementLDI in CAAM = combining ALM and Asset Management

LDI: combining strength in fixed

income, structuring and asset allocation

Asset Allocation Expertise

FixedIncome

LiabilityDriven

InvestmentPlatform

3.8 billion euros under LDI management

6 LDI specialistsFund managersProduct Specialists Engineers in quantitative research

8 open-ended funds4 euro bonds funds 1 inflation linked bonds funds3 LDI leveraged funds

27

What perspectives?What perspectives?33

28Leading players in continental Europe have started to Leading players in continental Europe have started to show the directionshow the direction

Recently, ABP took important strategic decisions

that are clearly consistent with LDI management

The bond risk premium is low at historical standard

and should remain low for the next 3 years.

Idem for the credit

Therefore, it seems more rewarding to re-allocation

a portion of the current fixed income portfolio to

equity (emerging zones) and alternative

investments (hedge funds, innovation…)

A contrario, inflation and duration risks on the

liabilities must be mitigated

Increased weight of inflation-linked bonds: +3%

Higher duration of the bond portfolio: 4,8 to 8 years

ABP strategic Asset Allocation

30,5%

3,5%2,0%

4,0% 3,5%2,5%

10,0%

0,0% 0,0%

4,0%

15,0%

25,0%

27%

5%

2%

5% 5%

3%

9%

2% 2%

7%

10%

23%

0%

5%

10%

15%

20%

25%

30%

35%

Equ

ity O

EC

E

Em

ergi

ng E

quity

Con

vert

ible

Bon

ds

Priv

ate

Equ

ity

Hed

ge F

unds

Com

mod

ities

Rea

l Est

ate

Infr

astr

uctu

re

Inno

vatio

n

Infla

tion

Link

ed

Gov

Bon

ds

Cor

pora

te B

onds

04-06

07-09

Source: ABP

29

LDI will drive changes for the fund industry future?LDI will drive changes for the fund industry future?

Implementation of LDI is at different stages across Europe

Regulators pressure is key for LDI development

LDI has started with a reshuffling of the fixed income portfolio

Higher fixed income allocation

Reduce the duration gap

Increase use of derivatives to hedge duration & inflation risk

Currently, one observes an increasing demand for Absolute Performance and Alternative Investment products (levered or not)

Asset managers and Investment banks have hired dedicated teams of specialists to provide actuarial, financial services and investment LDI solutions

Ranges of pooled funds (nominal & inflation linked) have been launched in the UK and Euro Zone as well as more customised investment solutions

30

ConclusionConclusion

Pension Funds all over the world face many challenges : demography, low rate environment, inflation pressures, funding status

Thanks to a proved experience of management of long term provisions and to dedication to innovation, CAAM offers LDI solutions to meet these challenges

31

14:00/15:15- Panel 3

Challenges of Pension Funds and Challenges of Pension Funds and Long Term Investments : What Liability Long Term Investments : What Liability

Driven Investment can Bring ?Driven Investment can Bring ?

Challenges of Pension Funds and Challenges of Pension Funds and Long Term Investments : What Liability Long Term Investments : What Liability

Driven Investment can Bring ?Driven Investment can Bring ?

32

Mumbai, Wednesday, May 16, 2007Mumbai, Wednesday, May 16, 2007

11STST FRENCH-INDIAN FINANCIAL FORUM FRENCH-INDIAN FINANCIAL FORUM

European Financial Markets:European Financial Markets:Opportunities for Growth Opportunities for Growth

and Value Creationand Value Creation