May 2012

GERMANY: German efficiency

LighbulbThe country’s asset managers have been rationalising and strengthening their existing fund ranges. Stefanie Eschenbacher reports. Stresstest was declared the word of 2011 by the Gesellschaft für deutsche Sprache, a government-sponsored association that researches and critically evaluates the German language. In recent years, more phrases related to economics, finance and inequality have made it into the association’s top ten ranking of most important words in public discussions. Paradoxically, Germany is currently Europe’s largest and most robust economy. The country has emerged a lot faster from the world economic crisis than many had predicted, despite its over-reliance on exports and weak domestic demand. Earlier this year, Standard & Poor’s downgraded more than half of the eurozone’s 17 member states, including France. Germany is now the eurozone’s only stable AAA-rated country. But Germany’s Wutbürger (enraged citizens) – to borrow the word of 2010 – are not just enraged but also worried. According to a recent survey by Gesellschaft für Konsumforschung, Germany “remains the most worried nation in Europe”. Unemployment tops the list of their concerns, although a downward trend is apparent. The issue of inflation, on the other hand, is becoming more pressing. Destatis, the federal statistical office in Germany, reported an annual inflation rate of 2.1% for March. Inflation has fallen in recent months, but remains a sensitive topic in Germany, a country that once suffered a monthly inflation of 29,500%. Despite fears of inflation mounting, Germans are reluctant to invest. Thomas Richter is chief executive officer of Bundesverband Investment and Asset Management, the country’s trade body for the asset management industry. Richter says many Germans choose to lose money to inflation rather than to take a risk and invest. Keen savers
Private savings rates are high, even though Germany’s public pension and insurance system is considered one of the most generous and sophisticated in the world. They are high even among those who earn little, and they remain high in old age. Eurostat, the statistical office of the European Union, has calculated a gross household savings rate of 16.7% for Germany. This compares to 2.2% in the UK, which has the highest real income per head, and to 10.8% for Europe, according to Eurostat. This would make Germany an attractive market for asset managers. Germans, however, have traditionally been conservative and risk averse with their investments. Richter says although the latest fund flow statistics show some money has been put back in funds, the flows are not enough to assume a reversal of this trend. Large amounts of money are therefore held in savings accounts, earning little or no interest. Daniel Lehmann, head of products for Europe at Allianz Global Investors, which is part of German insurance giant Allianz, says the financial crisis has “dramatically changed” Germany’s asset management landscape. “There is a lot of dissatisfaction,” Lehmann says. Investors got used to double-digit growth in a high beta market in the 1990s. But they were let down by the financial crisis. Lehmann says investors have lost trust in asset managers and advisers because many failed to manage downside risk during the financial crisis. “Asset managers and advisers have to restore investors’ trust and take their need for downside protection and comprehensive risk-rated solutions more seriously,” he says. There used to be a lot more “storytelling”, too, he says. “Advisers suddenly found themselves in a lot of difficult client discussions. It became clear that a business model that is built on just telling market stories is not sustainable as investors look for comprehensive solutions.” European equities, for example, used to be synonymous with safe investments. They are no more. “Investors in Germany are worried and have no orientation,” Lehmann says. “They are rather willing to accept a safe loss in real terms, for example, by investing into saving accounts or Bunds, than tackle the opportunities and take a downside risk.” With inflation worries mounting, there has been a flight to tangible assets, such as real estate and gold. Erich Seeger, a management board member at Commerz Real, responsible for sales of investment products, shares this line. Tangible assets
Commerz Real’s flagship fund range includes open-ended real estate, specialised real estate funds, and closed-ended funds for real estate, aviation, renewable energy and ships. “Tangible assets are always in demand when investors fear inflation,” Seeger says, adding that the fear of inflation has boosted demand for property and property-related investments. Seeger says many German investors – both retail and institutional – tend to be conservative and risk-averse. Prices for condominiums in prime locations, such as Munich and Hamburg, have risen by as much as 20% in the past couple of years owing to investor demand. Though Seeger says the outlook for these asset classes is favourable, regulation is strangling real estate asset managers. The Alternative Investment Fund Managers Directive in particular has been problematic for major parts of the German asset management industry because of the restrictions it imposes on real estate investment. “Under the current proposal, closed-ended funds could not invest in one single object anymore,” Seeger says. “It would require at least seven objects to diversify the product portfolio. This would significantly restrain the perspectives for closed-ended investment funds.” Thomas Rüschen, global head of key account management and head of European distribution at DWS Investments, the retail asset management arm for Deutsche Bank, says sentiment has been difficult when it comes to investing in funds. The March 2011 earthquake and tsunami in Japan, last August’s market crash as well as the ongoing discussions about the future of the eurozone have all eroded confidence in markets. “These events have caused a lot of uncertainty and sentiment is negative,” Rüschen says. “Investors are sitting on cash. Most of them missed the opportunities in January and February because they were too reluctant to invest.” Rationalisation
Among those products that sold well were dividend strategies that pay a steady stream of income, says Rüschen. “We are expanding our range of dividend funds.” “Our focus, however, is not on launching new products, but on strengthening our existing range.” Rationalising the fund range is an “ongoing exercise”, Rüschen says. “We are constantly assessing where we have gaps or overlays in our product range, where we have to reposition.” Allianz Global Investors has also reduced its range of funds, as well as the complexity. Since the financial crisis, Allianz Global Investors has closed or merged 300 funds in an effort to streamline and rationalise its offering. After major strategic acquisitions at the beginning, Lehmann says the asset management part of the business has grown organically over the past decade. Allianz’s asset management business is now run by two distinctive asset managers, with Allianz Global Investors being one. Other asset managers in Germany have pursued a similar strategy. According to the latest statistics by Bundesverband Investment and Asset Management, the industry has seen a net reduction in the number of funds available in Germany. There are 6,739 Publikumsfonds and 3,876 Spezialfonds registered. A total of 439 funds were closed in the course of last year, while just 419 funds were launched. In comparison, twice as many funds were launched in Germany in 2007. Throughout last year, 110 Aktienfonds, which invest in equities, were launched and 170 were closed. Rentenfonds, or pension funds, have seen a similar trend. While 98 Rentenfonds were launched, 104 were closed. Only among Mischfonds, which invest in equities, bonds and other securities, was the number of launches slightly larger than the number of closures. Asset managers launched 128 Mischfonds, but closed only 93. Mixed asset products in general gained some popularity in Germany, at least relative to equity funds. Richter says this was likely the result of the decline in markets and because German investors felt the need to spread risk through diversification. Consolidation
Detlef Glow, head of Lipper Europe, Middle East and Africa research, and Christoph Karg, content specialist for Germany and Austria, recently analysed launches, liquidations and mergers in Europe. Glow and Karg came to the conclusion that last year was a period of “focus on consolidation” of the available fund ranges. They say it was mainly a response to the European passport policies and other regulation which led to “huge” administrative burden and higher costs.   In recent years, cost has become a more important factor, especially as competition from passive funds intensified. At the end of last year 31,690 mutual funds were registered for sale in Europe, according to Glow and Karg’s Lipper Fund Market Insight Report, which was published last month. Luxembourg, which hosts 8,257 funds, continues to dominate the fund market in Europe, followed by France, where 4,735 fund were domiciled. Lipper counts 2,749 launches, 2,028 closures and 1,443 mergers. The quantity of new funds fell to the lowest of the past five years. Glow says mixed asset products were “a hot topic” last year. Even though absolute return funds were in discussion, Glow adds that not many products were successful and a number of them failed altogether. Glow points to performance numbers of absolute return funds, which show many have underperformed. The asset managers agree that the focus is now on strengthening the existing fund range rather than on launching new funds. “One tendency we see is that quality of funds is getting more important for distributors,” says Rüschen. “We cannot sell products just because they are branded DWS Investments or because we are the asset management arm of Deutsche Bank. Service, product quality, transparency and innovation are of paramount importance.” Risk control
Last year, DWS Investments launched trend-risk-control (TRC), a risk management overlay strategy for funds that aims to offer downside protection by monitoring several indicators, such as volatility, market momentum and liquidity. “When we launched these products, we took risk adversity of German investors into consideration,” he says, adding that most funds are sold within Germany. The bulk of the business is still domestic, both in terms of assets under management and flows. “Non-domestic asset management is growing as distribution channels have moved towards a guided architecture and tend to focus on global asset managers with a proven track record,” says Rüschen. “At the same time, we want to expand our importance in other markets.” DWS Investments’ funds are distributed through Deutsche Bank as well as major third-party sales channels, such as banks, independent financial advisers and other asset managers’ funds of funds. It offers a range of equity, bond and multi-asset funds, with its flagship products DWS Top Dividende and DWS Deutschland. In addition, it provides state-supported pension – or Riester – fund products. In November last year, Deutsche Bank announced that it would conduct a strategic review of its asset management division globally. Locusts
This excludes the DWS franchise in Germany, Europe and Asia, which it had already determined to be a core part of its retail offering in those markets.    There were several ad hoc fund closures over the past couple of years, but DWS Investments says apart from hedge fund and hedge-fund like strategies there was no obvious trend. The DWS Invest Hedge L/S Currency and the DWS Invest Global Equities 130/30, for example, failed to generate sufficient demand from investors and were deemed unsuitable for the German market. Former German vice chancellor Franz Müntefering once referred to hedge funds as Heuschrecken (locusts), a derogative animal metaphor, playing on their perceived greedy and destructive behaviour. The nickname stuck with hedge funds and, not surprisingly, also made it into the top ten ranking of most important words in public discussion. ©2012 funds europe

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