New rules prompt Spezialfonds boom
Interest in Germany’s Spezialfonds is booming.
Insurance companies and pension funds in the country almost doubled their investment in this type of fund last year, thanks in part to an obscurely worded change in investment regulations.
In 1995 insurers invested DM15.8bn ($xxbn) of assets in Spezialfonds -a type of investment fund designed specifically for the institutional market. By 1996, this figure ballooned to DM28.9bn, according to figures from the BAV -the German federal supervisory authority for the insurance industry.
In his latest report on the boom in Spezialfonds, Hans Karl Kandlbind-er, independent investment adviser and expert on the Spezialfonds market says two official circulars from the BAV, R4/95 and R7/95, resulted in more new investment by insurance companies in Spezialfonds. The rules are just for tied assets (gebundenes Vermoegen).
The first circular stated that Spezialfonds which were classed as pure bond funds would not be included in the equities quota, nor into the Spezialfonds quota. Kandlbinder says this theoretically means that investors regulated by the BAV could now hold 85% of their total assets in Spezialfonds -50% of assets in pure bond Spezialfonds and up to a further 35% in equities Spezialfonds.
Up until December 1995, the BAV had regarded Spezialfonds as one type of investment. This has changed,” Kandlbinder told IPE.
However, the wording of this new clause was somewhat ambiguous, and many in the industry did not at first grasp what it meant, he said.
The second circular constituted an indirect but clear encouragement for insurance companies and pension funds to invest via Spezialfonds, he said in his report. The directive allowed insurers to carry out futures and options business through a Spezialfonds -thus avoiding the catalogue of conditions they would have to fulfill were they to do it directly.
Total assets in Spezialfonds have soared to over DM462bn by the end of May this year. This means this breed of fund now has a 66% share of the total funds volume in the securities and money market investment funds sector in Germany, according to the report.
At the end of last year, insurers and institutional pensions schemes re-mained the most significant investors in Spezialfonds, accounting for 51% of Spezialfonds assets.
The second most important investor group in the funds were businesses; nearly half of Spezialfonds used by businesses were vehicles for investing book reserves for pensions purposes.
Foreign investors only accounted for 0.9% of investment in Spezialfonds, little changed from the year before. Insurance companies, pension funds and death benefit funds overall invested 11.74% of their total assets in securities Spezialfonds in December 1996, up from 10.52% at the end of 1995.
Among asset managers providing Spezialfonds services, subsidiaries of foreign banks gained the most ground in terms of market share. Spezialfonds assets under management by this group grew to DM22.87bn in 1996 from DM15.84bn the year before, bringing the slice of the market up to 5.8% from 5.2%, according to the report.
By far the biggest group of providers remained the major and regional banks, including Degef, DBI and Commerzinvest, where the market share stayed the same at 38.9% while the volume of funds under management swelled to DM153.05bn from DM119.28bn.
Kandlbinder says it is surprising that major and regional banks as well as private banks were heavily overrepresented as Spezialfonds providers for social security investors, while state regional banks and savings banks were noticeably underrepresented.
“Institutionalised pensions provision is still particularly strongly represented as Spezialfonds holders among the KAG groups of the private banks; this is also true for the KAG groups of the major and regional banks and surprisingly subsidiaries of foreign banks,” Kandlbinder says.
Newcomer providers to the market in 1996 included Dresdner Capital Invest and Axa Fondsmanagement fuer Kapitalanlagen, and one pro-vider, MAT, left the market. The Postbank Invest is entering the market in 1997.
There is a trend towards big Spezialfonds investors in Germany using banks to provide central or global custody services, in order to have unified reporting and transparent and easy access to every step in the investment process.
Kandlbinder says according to estimates, between two and 10% of Spezialfonds assets are now managed by a central custodian. But a few big investors have now jumped on the bandwagon, and this could speed this trend, he says.
Recent growth in Spezialfonds may have been rapid, but Kandlbinder warns that proposed tax changes could change this.
“With the draft 1999 tax reform law come threatening dark clouds not only on the Spezialfonds horizon, but above all… for Germany’s future position as an investment centre,” he says. Under the draft legislation, profits on disposals which are realised within 12 months in the funds would be taxed.
This new taxation method would hit retail funds first and foremost, but this would in turn affect Spezialfonds, he says. “But above all, this new tax method with not contribute anything to the budget in the next few years, it will just lead to costs…” says Kandlbinder.”