Digression: average size of specialised investment funds per ITC group
In this regard, however, the following finding is interesting: the average size per specialised investment fund (excluding specialised real estate investment funds) across the entire branch as at December 1999 (according to the survey, fund assets e473,840m, 4,805 specialised investment funds) has grown to e99m (previous year e87m). The analogous figures for the different ITC groups are shown in Chart 4.
This means that the volumes of the specialised investment funds of the private bank ITCs , as well as those of the major and regional banks, are close to the average; the former slightly over, the latter just below; the volumes of the specialised investment funds of the insurance interests, having more than doubled, are clearly above average, those of the specialised investment funds of the ITCs of the foreign banks are close to the average, those of the savings banks/state banks and co-operative banks are still well below average. The volumes of the specialised investment funds of the ‘others’ ITC group, by their excessive size, constitute a peculiarity that must be seen for what it is.

Analysis for insurance enterprises/ pension funds/death benefits funds
If the analysis is done from the ‘other side’, of the investors – because and to the extent that this is possible through the publications of the Federal Supervisory Office for Insurance Companies [Veröffentlichungen des Bundesaufsichtsamtes für das Versicherungswesen_(VerBAV)] and the annual reports of the BAV – the specialised investment fund placements of the largest investor group, namely all of the insurance enterprises and the pension funds/death benefits funds, Tables 10–12 provide some interesting findings. This insurance enterprises/pension funds/death benefits funds investor group holds more than 52% of the specialised investment fund volume, which concurs with Table 4 in accordance with the survey carried out by the author and with Table 5, which is based on Bundesbank figures, and thus in general terms represents the most significant investor group among the specialised investment funds.
Since 1975, when the major amendment to the insurance supervision law (Versicherungsaufsichtsgesetz (VAG)) took the first steps towards liberalisation and deregulation, combined with more transparent accounting for external observers, even in the case of capital investments, the position of securities special assets underwent some major changes (see Table 10). In the interim (from 1990–94), the specialised investment funds, even under their own sub-heading as ‘securities-based specialised investment funds’ were exactly accessible: unfortunately, following a BAV statistical reform of the documentary proof to be supplied accordingly by the insurance enterprises, this was no longer possible after 1995, so that once again it was a matter of resorting to estimates, which did nevertheless correspond reasonably well to the actual circumstances.
‘Self-determined’ investment preferences with specialised investment funds
Although the full decision-making powers of an investment trust company which manages a specialised investment fund have a solid legal basis, and in practice are undisputed, the following comment may be made: the discontinuation of the practice of showing the securities-based specialised investment funds under their own heading after 1995 as a result of changes in the BAV statistics is still disadvantageous for an analysis of the fund-managed capital investments of German insurance enterprises. With regard to the insurance enterprises’ ‘certain powers of intervention’ in the investment policy of the investment trust companies, there is a crucial difference between investment funds open to the general public, on the one hand, and specialised investment funds on the other.
Only with investment through specialised investment funds was the insurance enterprise able to use its company-specific investment preferences to advantage by means of its involvement on the investment board, and for example to prevent, or at the appropriate time to reduce undesirable regional selectivity in investment. In this connection, one has only to think of the consequences of the Asian crisis. Such ‘influence potential’ is in any case in the understandable interest of insurance supervision and of those insured, and has clearly to be disassociated from the expression ‘self-controlled funds’, as in any case the investment trust company absolutely has to manage its special assets with due and proper professional prudence on behalf of all unit-holders. “In carrying out its duties it acts independently of the depository bank, and exclusively in the interests of the unit-holders, and in particular in exercising the voting and creditor’s rights connected with the special assets” (§10, paragraph 1, clauses 1 and 2 KAGG). Management of the fund is absolutely the responsibility of the ITC, and in practice always produces a fruitful symbiosis.
Investing through investment funds open to the general public, insurance enterprises, as unit holders – legally – do not have this control facility. They can, however, quickly divest themselves of these units by selling them, if they no longer agree with the general direction of the investments. Showing the insurance enterprises’ capital investments separately from the investment funds open to the general public and specialised investment funds in the BAV statistics should have made it possible to ascertain the extent to which the fund-type investment of the insurance enterprises/pension funds/death benefits funds is determined by outside factors or even self-determined .

Even BAV annual report emphasises advantages of specialised investment funds
For the first time in an annual report from the Federal Supervisory Office for Insurance Companies – in which once again it is reported that there has been a sharp rise in placements in investment trust units (90% of which could well be specialised investment fund units) – there are passages which emphasise the advantages of specialised investment funds. While these advantages are known, never before have they been specifically stated by the supervisory authorities. The BAV annual report for 1999, part A, page 90, reads: “One advantage of placements in investment trust units, compared to direct investment, is the more liberal possibility of investing in special assets. Also, distributions are reported under current earnings, even if they are derived from the realisation of undisclosed reserves within the special assets. Distributions are taken into the so-called association formula ‘return’.”
The fact that insurance enterprises/pension funds/death benefits funds need additional revenue at times when capital market interest rates are relatively low and share dividend yields relatively meagre is quite understandable, and may in fact ideally be shown by the realisation of capital gains in specialised investment funds with subsequent distribution. However, the fact that the insurance supervisory authorities now openly acknowledge that specialised investment funds offer the insurance enterprises/pension funds/death benefits funds ‘more liberal investment possibilities’ through than by direct investment is a welcome and pleasant novelty. The following are the three main areas that could be interpreted as the’more liberal investment possibilities’ offered by specialised investment funds.
First there is the BAV Circular R 7/95, which specifically regulates the use of financial derivative instruments by the supervised insurance enterprises/pension funds/ death benefits funds, when they operate directly with such ‘futures and options transactions and similar financial instruments’ as defined in §7, paragraph 2, VAG. Where such hedging transactions, pre-purchase transactions and/or income-boosting transactions, including combined strategies, are undertaken in direct investment, precise organisational methods and procedures covering ‘dealing, securities techniques, risk management and auditing – observing strict functional divisions’ have to be set up first, and detailed information and reporting obligations have to be complied with by management on an ongoing basis, not only with regard to the BAV, but also the particular company’s own supervisory committee (supervisory board).
All of these ‘checks and barriers’, which are certainly justified, can be avoided by transacting such derivative financial business exclusively in specialised investment funds. The insurance supervisory authorities may then legally waive additional limitations and/or reporting, since in specialised investment funds derivative transactions are executed within the framework of the KAGG, and are therefore in any case already regulated under the supervision of the BAKred. In this sense, the author has in an earlier publication already referred to BAV Circular R 7/95 as in certain respects the ‘specialised investment funds circular’.
Secondly, with the advantages of specialised investment funds referred to, the BAV might also have given some thought to raising certain restrictive investment limits legally through placements in specialised investment funds. If, for example, a company utilises the permitted equity ratio exclusively through such specialised investment funds, the equities or participation rights, most of which are fully subscribed in accordance with the contract terms, licensed for trading in a member state of the European Community on an official stock market, or included in an organised market, or debenture bonds within the meaning of number 3 figures a and b issued predominantly in a member state, then there may be an under-representation of equities and/or participation rights of non-EU and non-EU listed issuers. In such a case, the proportion of equities and participation rights of companies based in a state outside the European Community actually calculated for the institutional investor may amount to up to 14.9% of the cover fund assets, more than twice the 6% prescribed for direct investment, provided any other currency mismatched investments do not exceed 5.1% of the cover fund assets. At times when international non-EU equity investments are in vogue, it is precisely this advantage of the placements in specialised investment funds over direct investments which institutional investors in the insurance enterprises/pension funds/death benefits funds branch are happy to use.
The third possibility for investment is provided by §8, paragraph 2, KAGG. This permits investment funds (and therefore also specialised investment funds) to “invest up to a maximum of 10% of the special asset value in securities which are not listed for official trading on a stock market or included in an organised market, with the exception of the money market securities listed in paragraph 3…”, which insurance enterprises/pension funds/death benefit funds are not allowed to do.
In all three cases, therefore, the insurance supervisory authorities quite correctly put their trust in the provisions of the KAGG and its supervision by the banking supervisory authorities, so that investing in specialised investment funds really does give the supervised company ‘more liberal investment possibilities’ than direct investment.

Significant role of specialised investment funds for insurance enterprises/pension funds/death benefits funds
In 1999, the significance of the specialised investment funds for the insurance enterprises/pension funds/death benefits funds investment group grew further, and can hardly be overestimated:
q 20.14% of total investments by insurance enterprises/pension funds/death benefits funds were invested through investment funds as of December 1999 (previous year 17.74%) and most of these – over 18% of total investments as at the end of 1999 – in securities-based specialised investment funds (previous year 15.97%).
q If the heading of securities (that is equities, fixed-interest and fund certificates), which is in any case only ‘fund capable’ is taken as a reference basis as at the same date in December 1999 (figures in brackets are as at December 1998), the corresponding reference figures as at December 1999 are as follows: 57.68% (51.32) of securities-based investments are certificates from securities-based investment funds, of which most, in December 1999 exactly 51.9% (in December 1998 the figure was 46.16%), securities-based investments were certificates from securities-based specialised investment funds. This further rise in specialised investment fund placements means that the 50% mark has been passed for the first time. Since 1999, well over half of the capital assets of the insurance enterprises/pension funds/death benefits funds which are generally only fund capable have been invested in specialised investment funds – which means that ‘the end of the road for specialised investment fund placements’ is still some way off, as it is well known in the branch that the insurance enterprises/pension funds/death benefits funds, which are supervised under the VAG are de facto able to invest all of their tied assets exclusively in specialised investment funds, provided the specialised investment fund placements are skilfully spread, for example 30% in equity-based or mixed specialised investment funds, 45% in ‘purely bond specialised investment funds’, and 25% in specialised real estate investment funds.
q If the sales receipts for the year 1999 for the specialised investment funds (excluding specialised real estate investment funds) according to the Bundesbank capital market statistics are set in relation to the corresponding net additions ‘units in securities special assets’ or according to the new category ‘investment units’ with insurance enterprises/pension funds/death benefits funds in accordance with BAV publications, the significance of the insurance enterprises in the broadest sense for the securities-based specialised investment funds investment medium once again becomes evident (see Table 11): even more clearly than before, in 1999 the lion’s share, over 53%, of the net sales receipts of specialised investment funds was derived from the insurance enterprises, pension funds and death benefits funds which are subject to VAG supervision;
q In 1999, this investor group once again recorded a respectable growth rate of around 3.6%, compared to what had flowed into specialised investment funds on balance the previous year, and the trend towards new specialised investment fund issues by the insurance enterprises/pension funds/death benefits funds investor group, which has been rising steadily since 1994, is in absolute terms even more impressive: from DM13bn in 1994, it grew to DM58.2bn in 1998 and to DM60.2bn in 1999. This growth of new investments in specialised investment funds by the insurance enterprises/pension funds/death benefits funds investor group clearly highlights the sustained positive effects of the BAV circulars R4/95 and R7/95. As indicated above, this has now also been reported in black and white in the positive remarks made about specialised investment funds in part A, page 90, of the BAV’s 1999 annual report.
The enormous new influx of funds into the securities-based specialised investment funds from the insurance enterprises/pension funds/death benefits funds investor group is also underlined by the Bundesbank statistics, although this year, for the first time, Table 13 does not concur with the conclusions which can be drawn from the BAV statistics. In 1999, according to the Bundesbank capital market statistics, e24.4bn flowed from the insurance sector, including pension funds and occupational retirement schemes, into specialised investment funds (excluding specialised real estate investment funds), in which may be included part of the inflow from the social insurance institutions and public supplementary benefits schemes sector (which we estimate to be half of e1.7bn) – but both of these together will never be anywhere near the DM60.2bn (e30.8bn) which flowed into the specialised investment funds in 1999 from the insurance enterprises/pension funds/death benefits funds sector. As we went to press, there was still no explanation for this discrepancy; it might, however, lie with the “over-weighting approach” in the Bundesbank statistics already referred to compared to the volume-source classification of individual funds in the author’s survey.

Current values and book values of specialised investment funds of insurance enterprises/pension funds/ death benefits funds
In cross-checking Table 12, ‘Proportion of securities-based specialised investment funds in capital investments overall and in securities-based investments for each category of insurance’ (it should be noted that Table 12 is an itemisation of Table 10, with the addition of details from VerBAV 4/00), together with Tables 4 and 5, the following considerations may be expanded.
According to the Bundesbank statistics (see Table 5), the current values of the specialised investment fund placements by the insurance enterprises, including pension funds and occupational retirement schemes amounted to about DM467bn (previous year DM358bn) as at December 1999; by converting the results of the author’s survey, the analogous figure for almost the same investor groups is approximately DM484bn (previous year DM365bn), thus practically identical, ie, marginally higher, only because the author has also included the public law supplementary retirement funds under the item specialised investment funds for the ‘institutional retirement schemes’.
Compared with this ‘current value’ are the aggregated book values of the specialised investment funds of the insurance enterprises/pension funds/death benefits funds (that is, excluding the specialised investment funds of the occupational retirement funds and excluding those of the public supplementary pension funds) – according to Tables 10 and 12 based on BAV sources – at DM322bn (previous year DM261bn); all investment units) and DM289bn (previous year DM235bn); estimated securities-based specialised investment funds respectively.
If in the case of the current value of specialised investment funds volumes, approximately DM484bn (previous year DM365bn) of the insurance enter-prises/pension funds/death benefits funds investor group a certain deduction is made for the specialised investment funds which are “surplus” as a result of the different investor group classification by the Bundesbank and the author relative to the BAV sources, there nevertheless remains a substantial undisclosed undervaluation to be estimated in the capital investments of the insurance enterprises/pension funds/death benefits funds, which will one day benefit the insured and pensioners/retirees only if it is (still) available at the time when it is needed and is due to be realised.

‘Advisory’ – between EU conventions and German law
The ‘outsourcing’ issue is one in which ‘advisory’ certainly plays a major role, in that investment consultancy is a widespread international business, one which in many EU states especially is treated fairly liberally – right down to the clear provisions of the Austrian law on investment funds, which in §3 paragraph 3 states: “The investment trust company is empowered to use the services of third parties in the management of unit trust funds, and also to assign to these the right of disposal over the assets; the third party shall in this event be acting for the account of the unit holder. … The investment trust company is liable for the dealings of the third party as for its own dealings.”
The practice in Germany, and the answer, are clearly different, because the law and the Federal Banking Supervisory Office have laid down unequivocal standards on this: pure ‘advisory’ – yes, but most certainly not more. Naturally, the details cover everything about the layout of the contract. Although it is known that top international investment managers who have no investment trust company of their own in Germany, or not yet, are pressing for this advisory basis on the German investment market/specialised investment funds market, there are no specifics on how far this practice has spread. In any event, the ITCs newly established last year, focusing mainly on foreign bank subsidiaries, are also interpreting the expansion of the services they provide relating to specialised investment funds in this way. Some international asset management companies, including investment trust companies domiciled in Germany, openly advertise using two different figures to highlight their uniform expertise in the field of asset management and investment consultancy: one figure represents the ‘volume under management’ in impressive billion amounts, and the second the additional advisory potential, although this too with almost identical billion amounts may be no less impressive than directly managed assets. But there is no market transparency in this sector, and the author’s investigations are concentrated just on the specialised investment funds sector.
Nevertheless, the amendment of the EU Investment Directive will stimulate some movement on the outsourcing issue. It is expected to say that the rigid stance taken by Germany cannot be maintained, or – as a high-ranking representative of the Federal Banking Supervisory Office, divisional president Volckmar Bartels, wisely said recently: “What we don’t want to do under these auspices on the one hand is to weaken Germany’s negotiating position in Brussels with an overly ambitious interpretation of the existing KAGG, nor on the other hand to push the investment companies into forms of organisation which in all probability will no longer be open to challenge by the law in the near or medium-term future.”

Specialised investment funds expand strongly in Luxembourg
The development of specialised investment funds in Luxembourg, which to begin with had proceeded at a fairly measured pace, following the ‘law of 19 July 1991 relating to those collective investment organisations whose shares are not intended for public placement’, but which had already started to pick up in recent years, forged ahead strongly in 1999.
As at 31 December 1998 (the figures in brackets are the corresponding figures for the previous year) there were 132 (113) specialised investment funds in Luxembourg, in 339 (215) part-funds. Their funds volume is the equivalent of approximately e33.3bn (e15.7bn), representing a 4.53% (3.22%) share of the whole Luxembourg investment funds market. For the third consecutive year, fund volume has exactly doubled from the previous year.
Of the 132 (previous year 113) specialised investment funds existing as the end of 1999, 82 (71) were Fonds Communs de Placement (mutual funds), 47 (39) were SICAVs (open-end investment trusts), and three (three) were SICAFs (closed-end investment trusts), constituting in number terms 8.1% (previous year 7.43%) of the undertakings for collective investment in Luxembourg. The 339 (215) specialised part-funds represent 5.81% (4.15%) of all 5,836 (5,178) Luxembourg part-funds. In terms of fund volume, the specialised investment fund FCPs are by far the strongest group of specialised investment funds, with two-thirds, or e21.4bn (e11.2bn), followed by the specialised investment fund SICAVs with e11.7bn (e4.4bn), while the specialised investment fund SICAFs, with e300m (e100m) can almost be disregarded.
It should also be noted that 16 (13) specialised investment funds, in 80 (47) part-funds, are listed on the Luxembourg stock exchange, albeit with a rider that the units/equities concerned can only be purchased by institutional investors (valeurs mobilières réservées aux investisseurs institutionels).
An official listing of this kind for Luxembourg specialised investment funds, which also cannot be owned by individuals but in which only ‘investisseurs institutionnels’ (institutional investors) may invest (but unlike in Germany and Austria they are not limited to 10 funds each), can bring supervisory-relevant advantages for an investor who is subject to supervision. For German institutional investors, however, this Luxembourg specialised investment fund vehicle is of interest only if the investor in question is exempt from tax.
As the list of the names and public promoters of these Luxembourg specialised investment funds shows, this has so far been largely restricted to non-German bank sponsors and investors. But as was already seen in the list published in this study last year, there is already a considerable number of well-known addresses in Germany who have gone into the specialised investment fund business in Luxembourg (ADIG, Deka, Dresdner Asset Management, Helaba, Hypo Capital Management, Landesbank Rheinland Pfalz International, MM Warburg, R+V, Sal Oppenheim, SMH and Trinkaus), and the list has continued to grow (DWS and BfG).

Specialised investment funds still expanding
The specialised investment fund investment medium (excluding specialised real estate investment funds) has coped well since it reached and passed its peak in 1998, as although growth is clearly slowing it remains at a high level, and specialised investment funds have not come crashing down. The specialised real estate investment fund, for its part, is beginning a boom. Even on the tax front, there are no clouds on the horizon for the foreseeable future.
The specialised investment fund will therefore continue to grow, not only benefiting from BAV interpretations of the VAG, but also because of the dawning of employee pension funds on the horizon of the scheduled fourth capital markets promotion law; these funds, which following the Anglo-American model, will certainly be a possibility in Germany too. Irrespective of how, or even if, these ‘occupational pension funds’ turn out – together with the other, highly topical different forms of incentive for private old-age pensions which are also being discussed by the Federal Ministry of Employment – will give a further boost to the growth of funds volume and new issues of specialised investment funds.