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 (BAV)) 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 to 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 also de facto 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 (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; since then this has only been possible subsequently, as it were, for direct insurers, and then only in the ‘Part B’ edition of the BAV annual report. All the same, these publications show that among direct insurers, in the years after 1995, up to as much as 95% of the “investment units” were comprised of specialised investment funds. That means that the author’s assumption, published for years, that 90% of the “investment units” item represent all the insurance enterprises’ specialised investment funds is somewhat ‘understated’ for the specialised investment funds.

“Self-determined” investment preferences
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, there are crucial differences between investment funds open to the general public, on the one hand, and specialised investment funds on the other in respect of the insurance enterprises’ “certain powers of intervention” in the investment policy of the investment trust companies, something the insurance enterprises appreciate with their fund-managed capital investments.
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 advisory 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 investors’ “self-controlled funds” (Selbsteuererfonds), 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” (section 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.
One noteworthy decision by the BAV in 1999 on a Luxembourg specialised investment fund, where there is normally no investment committee, authorised an insurance enterprise to make the corresponding investment from the cover fund (Deckungstock), but added an important clause, and accordingly this decision is quoted here, with the relevant passage in italics: “The investment fund was set up under the Luxembourg law of 19.07.1991 relating to collective investment institutions, whose securities are not intended for sale to the public. It permits the issue exclusively to institutional investors of certain specialised investment funds, but, by contrast with German law, does not limit the number of institutional investors. To that extent they are therefore similar to a public fund. Consequently, there is no provision for an investment committee with such Luxembourg specialised investment funds. On that basis, the German federal supervisory office has dispensed with the otherwise requisite setting up of an investment committee through which the insurance enterprise can influence investment policy.”

Advantages of funds from the point of view of supervision
In the BAV annual report for 1999 (Part A), the federal supervisory office for insurance companies had for the first time specifically laid down the special advantages for insurance enterprises/pension funds/death benefits funds of investing via specialised investment funds: “One advantage of investing in investment units as opposed to direct investment are the less restricted possibilities of investing in special assets. Additionally, payouts are reported under current earnings, even if they are derived from the realisation of undisclosed reserves within the special assets. Payouts are entered under the so-called ‘payment of interest by the association formula for yields’.”
Three sectors are referred to under “less restricted investment possibilities”:
q investment in unlisted securities totalling up to 10% of the special assets;
q the “legal” raising of restrictive investment limits by full utilisation of the “underweight” potential investments in special assets that comply exactly with the “overweight” rule in section 54a paragraph 2 no. 6 clause 1 VAG, and
q undertaking derivative transactions within the special assets within the framework of the KAGG.
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.

Funds and insurance companies/ pension funds/death benefits funds
In 2000, the significance of the specialised investment funds for the insurance companies/pension funds/death benefits funds investment group continued to increase, and can therefore hardly be overestimated:
q 22.34% of total investments by insurance enterprises/pension funds/ death benefits funds were invested through investment funds as of December 2000 (previous year 20.14%) and most of these, over 20% of total investments as at the end of 2000, in securities-based specialised investment funds (previous year 18.13%).
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 2000 (figures in brackets are as at December 1999), the corresponding reference figures as at December 2000 are as follows: 62.97% (57.68%) of securities-based investments are certificates from securities-based investment funds, of which most, in December 2000 exactly 56.68% (51.9%), securities-based investments were certificates from securities-based specialised investment funds. This further rise in specialised investment fund placements means that the 50% mark, passed for the first time in 1999, was no nine-day wonder, but is consistently in line with the long-term trend: 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 2000 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 (cf. Table 11): even more clearly than before, in 2000 the lion’s share, over 68%, 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 Although the flow of funds from this investor group into specialised investment funds in 2000 was almost 1.8% down on the previous year, it was still considerable, and constitutes the second highest amount going into specialised investment funds from the insurance enterprises/pension funds/death benefits funds in any single year to date. Not without good reason have the insurance enterprises now actively started increasingly to move into specialised investment funds business with their ITC interests, as well as from the provider side.
The enormous new flow 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 (Table 13), as the amounts shown there, at e29.6bn, given the different design of the Bundesbank statistics not really so far from the DM59.1bn which has flowed into specialised investment funds from the insurance enterprises/pension funds/death benefits funds investor group, as in Table 11.
Otherwise, it is to be expected that the insurance enterprises/pension funds/ death benefits funds investor group will in future have even more scope for ‘mixed’ specialised investment funds if the supervisory regulations give them the option of enabling a more risk-appropriate detailed estimate for the fixed-interest securities in the specialised investment funds, so that the 30% equity limit will be clearly eased, and will only apply where the investment really is in equity-based funds.

Current values and book values
In the case of the current and book values of specialised investment fund placements by the insurance enterprises/pension funds/ death benefits funds group, we have previously had to speculate a great deal in order to get into line with any sort of statements. But now there are concrete data available from the federal supervisory office for the insurance companies, as the insurance enterprises have to report the current values of their investments separately to the BAV, according to investment type. Regrettably, data are still missing from pension funds/death benefits funds, although for these investor groups the undisclosed reserves in the specialised investment funds could be even larger, as pension funds/ death benefits funds were among the first institutionals to invest in specialised investment funds (Chart 6).

‘Advisory’ – between German law and EU conventions
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 section 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.”
In Germany, too, the sting has now been taken out of this issue, as the official word from the federal banking supervisory office was that the “core business circular” of September 1997 is regarded as having been practically retracted, as not even an “empty shell” can become an investment trust company. The sector is now eagerly awaiting a circular that has been announced by the federal banking supervisory office. Until then, in the wise words of a high-ranking representative of the federal banking supervisory office (divisional president Volckmar Bartels) in a speech in 2000, it is still the case that: “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.”

Luxembourg specialised investment funds reach e40bn fund volume
The development of specialised investment funds in Luxembourg was late in starting, 10 years ago with the enactment of the law of 19 July 1991 relating to those collective investment institutions whose shares are not intended for public placement. This Luxembourg investment vehicle has now reached the substantial size of e40bn and has been described in detail by the author in a separate study in the Frankfurt journal Kreditwesen (issue 8/2001, pages 414–24), as well as in the May 2001 issue of IPE (pages 38–40).

Funds remain on an expansionary course
The specialised investment fund investment medium (excluding specialised real estate investment funds) has coped well since it reached and passed its peak in 1999, 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 is no longer anything untoward expected in the foreseeable future.
There was considerable restructuring “on the inside” of the specialised investment fund investment medium during the year 2000: while in overall terms the specialised investment funds market saw moderate growth of 7% over previous years, the specialised investment funds were expanding those investment trust companies that represent insurance interests, as well as those that are foreign bank subsidiaries, well into double-figure percentages, both in terms of volumes and of fund numbers. Accordingly, we can certainly sum up: “Year 2000 – for specialised investment funds, the year of insurance enterprise ITCs and foreign ITCs”.
As for the rest, the fourth financial market promotion law and the forthcoming pension funds will fire the continued development of the specialised investment fund investment medium in Germany.
This report was originally this summer in German in Zeitschrift für das gesamte Kreditwesen (issue 16 & 17/01) by Frankfurt-based publishers Fritz Knapp Verlag

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