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Funds go to Euroland

The remarkable shift in Spezialfonds investment to international equities has been tracked by US consultants Greenwich Associates in their recent report on the market. Funds are now allocating nearly 20% of their assets internationally, with almost three quarters of this going to non-German European equity.

With the German equity proportion staying where it has been since the 1990s at the 27% of the portfolios covered in the survey which amount to DM228bn ($135bn) held in Spezialfonds of over 160 institutions. The move to international equity has been at the expense of fixed income securities, which has fallen from 45% in 1994 to 40% currently, according to Greenwich. The insurance companies had 30% in domestic equities and 21% internationally, compared with 23% and 16% respectively for corporations and pension funds.

The returns being obtained by insurance companies on their bond portfolios had fallen from 6.5% in 1996 to 5.7% in 1998, while the returns on the German equity portfolios varied even more dramatically, falling from 9.2% to 8.4% over the two years, and on international equities their returns slipped from 9.9% to 9.0%. By contrast corporations and pension funds, outperformed smartly, seeing the return on domestic equities climb from 8.7% to 10.9% and on the international side from 9.8% to 11.0%. Even on domestic bonds, they beat the insurers albeit marginally with a return of 5.8% this year.

Things are on the move regarding balanced mandates, with only 29% of the respondents using only a balanced manager compared with 33% two years ago, with 45% using both specialist and balanced. Greenwich Associates point out that "only 15% will hire balanced managers during the next 12 months, down from 21%". When it comes to the Spezialfonds over DM1bn, about a third of these will be hiring only specialised managers.

The difference in approach to taking the asset allocation decisions between insurance companies and corporations/pension funds, with 85% of insurers doing this internally compared with 68% for corporations and pension funds, of whom 18% give this responsibility to their balanced manager, but only 2% of insurers do. Some 5% use a consultant for this task, while insurers never do.

There seems to be an increasing trend to use more managers, consistent with the move to more specialists being used. The average numbers used has crept up from 4.7 to 5.2 over the two year period.

And how are these managers assessed? The proportion of Spezialfonds whose key method of evaluation is by setting a specific benchmark has jumped from around 20% in 1996 to nearly 30% this year. While the practice of setting each manager a minimum return for the year and to evaluate each one against this has almost halved to 10% in the two years. A third of all surveyed said the compare their managers' performance with an market index.

The assets of the largest Spezialfonds with over DM1bn in assets have been growing at faster rate than the average, with the top 75 funds accounting for a 135% growth in assets in 1997, even more spectacular than the 82% for all funds together.

Greenwich Associates says smaller funds need to reconsider their relatively large allocation to domestic fixed income securities. The funds gaining most in assets are those who are the most frequent users of sophisticated techniques , use more specialist managers and have a higher exposure to international equities.

But as to the prospects for Spezialfonds for the millennium, a growth rate of just 23% to the years 2000 is predicted, but with the DM1bn funds not quite keeping pace,having a 21.5% rise. The insurance company fund growth rate is expected to exceed 30%, while that for corporations and pension funds is expected to be above the average at 26%. Fennell Betson

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