German asset management institutions should see fierce competition from large as well as small specialist external managers, as the region has become an ideal location to set up shop, according to Fitch Ratings.
“Most of the large foreign players have invested in infrastructure and human resources through acquisitions. Germany is a preferred target, especially as institutional investors are more open to diversification,” says Roger Schneider, director at the fund and asset manager rating group.
The role of foreign managers is likely to rise and will be aided by financial intermediaries and independent distribution platforms that are increasingly embracing open architecture. Essentially, German institutions will either have to adapt or be left behind. Fitch believes that specialist, tailor-made products offered by foreign managers will pose a threat to those that don’t adjust their business model. Schneider said that German companies fell behind particularly when it came to exotic investments such as commodities and LDI solutions.
These days, German investors are either interested in low-risk money market assets or higher-risk instruments outside the investment management industry. Intra market competition via banks’ issuance of Zertifikate (structured notes) is also intensifying and will increasingly challenge the industry’s ability to source assets.
Government reforms leading to more flexible regulation is another contributing factor to making Germany a more attractive market. Key reforms in the investment and pension fund laws is certain to help overcome the general perception that the market is over-regulated and slow to innovate and should help the German market compete with other fund centres such as Luxembourg and Ireland. “We believe deregulation on the regulatory framework will increase competition between industry players,” adds Schneider. Of course, EU passporting has also meant easier access to central European countries such as Germany.
“There is still growth opportunities as the involvement of asset managers in the market for occupational and private pension management is expected to rise after recent reforms. Fresh impulses will come from new products initiatives under the revised regulatory framework,” adds Aymeric Poizot, senior director of Fitch.
The German asset management industry had more than e1.4 trillion in assets under management at the end of 2006 and has shown continuous growth over the past ten years, according to Fitch. “The key challenge for the German asset manager,” adds Schneider, “ is to continuously renew their book of business. They need to open up to innovation and move away from their generalistic views."
© fe July 2007