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No end to the boom in specialised investment funds

At the end of 1996, the volume of specialised investment funds stood at just below DM400bn ($238bn). By the end of 1997, this investment medium had recorded a further spectacular jump to over DM555bn in terms of fund volume: this success, too, is fully attributable to the securities-based specialised investment fund, since the money market specialised investment funds (three in number from August 1997, and peaking at DM312m in terms of funds volume during 1997) are tending to be sidelined by the former; the real estate specialised investment fund, too, is still little more than a makeweight compared to both the securities-based specialised investment fund and to the real estate fund open to the general public. Although the real estate specialised investment fund, with continued growth in terms of new fund investments, a new fund provider, and new holders (in the form of insurance enterprises) does appear to have succeeded in making a breakthrough (cf. Kandlbinder, 'Positiver Durchbruch bei Immobilienspezialfonds?' in Der Lang-fristige Kredit, 11/98).

One record year after another

Net sales receipts into the specialised investment funds during 1997 broke all previous records, at DM107m (+71.6% against the previous peak year, 1996):

Even with the inclusion of sales receipts into foreign funds of German pr ovenance (Luxembourg and Ireland), almost 80% of the net sales receipts in the German investment funds branch went to specialised investment funds in 1997 (as in the previous year, although at that time these 'German foreign funds' were not yet integrated into this picture); or, to put it another way, specialised investment funds attracted almost four times more receipts than all of the investment funds open to the general public together.

As at the end of 1997, according to Bundesbank statistics, in terms of funds volume well over half of the receipts of the investment funds branch, in fact 61.7%, went into specialised investment funds, whose volume at the end of 1997 had risen to over DM555bn (see Table 2).

The specialised investment funds volume thus saw a further powerful increase during 1997, by DM157.1bn or 39.7%; volume growth in 1997 was therefore once again considerably greater than in the previous year (when it was DM86.7bn, or 27.9%).

The growth in new fund issues raced ahead at an almost unbelievable pace: according to Bundesbank statistics, 550 new specialised investment funds during 1997 meant an 18.6% rise in the number of funds (in the previous year an additional 334 new specialised investment funds, a growth rate at that time of 12.7%).

Even more meaningful, however, in the light of this excessive new specialised investment funds circulation rate is the finding that in Germany in 1997, no fewer than two (yes, two) new specialised investment funds were issued for every banking day.

... and in 1998, the boom goes on

In the first five months of 1998, net receipts in the securities-based/ money market specialised investment funds totalled DM52,308 m, an average of DM10,462m per month (1997: DM8,914m per month), while the comparative figures for German investment funds open to the general public stood at just below 40% of this, thanks only to the receipts in real estate funds. Without the real estate funds, the figure would be only about one-third of the net receipts of the specialised investment funds.

As at the end of May 1998, the figures for investment fund numbers and fund volumes are as follows: 447 equity-based investment funds open to the general public (including mixed funds) account for around 15% of the total funds volume of the securities-based/money market investment fund branch, at DM146,329m; 311 money market and bond funds open to the general public with DM161,768m in volume represent just under 17% of the entire funds volume of the securities-based/money market investment fund sector.

However, as at the end of May of this year, 3,788 securities-based/ money market specialised investment funds, with an average volume per fund of DM175m (DM147m as at the end of May 1997), achieved a total funds volume of DM662,041m, which is over 68% of the total funds volume, DM970,138m, in the securities-based and money market investment funds branch. This proportion has risen once again from the previous year's level, and underlines the continued importance of the specialised investment fund, which constitutes over two-thirds of the securities-based/money market investment fund market. According to Bundesbank statistics, new specialised investment fund issues so far in 1998 are even exceeding the boom year of 1997: 297 new fund issues in the first five months of 1998 mean de facto almost three (!) new specialised investment funds for each banking day (with 101 banking days from January to May 1998); in 1997 the figure was 'only' 2.3.

Equity quota of the specialised investment funds continues to rise

The asset distribution weighting of the securities-based specialised in-vestment funds has again shifted, perceptibly in the direction of dom-estic and foreign equities, which at the end of 1996 already accounted for 30% of the funds volume of the securities-based specialised investment funds, compared with 25% at the end of 1995; as at the end of 1997, however, they had already reached around 36%.This is further reinforced by the latest Bundesbank figures available as at the end of May 1998 (see Chart 1): the equity ratio of the securities-based specialised investment funds amounted as at 5/98 to over 40% of the entire funds volume.

Substantial rises in value in specialised investment funds, as well as high receipts

The Bundesbank capital market statistics show that in 1997, there were substantial increases in the value of specialised investment funds, quite apart from the high receipts (the same was naturally true of the investment funds open to the general public). Take the volume of specialised investment funds as at the end of 1996, deduct the distributions of income executed in 1997 but add net receipts in 1997, then the effective value increase in 1997 can be calculated by incorporating the resulting funds volume value as at 12/97 with the actual values of the specialised investment funds volumes as at 12/97, even subdivided into bond, equity and mixed specialised investment funds. But the capital gains realised in specialised investment funds, however, cannot be derived from these, as they are beyond more conclusive calculation. Benefiting from the global capital market situation (low bond interest rates/positive equity price trends at home and abroad), the arithmetical results of Chart 2 are quite impressive, but should not, however, lead the tax-hungry fiscal authorities to make some disastrous decisions, since there are naturally other phases, too, which will come again (for example, it would only take interest rates to rise once more ... ).

Survey results on the structure of holders of specialised investment funds

All 50 investment trust companies took part in the 1997 year-end survey of investment trust companies; as at the end of 1997, these companies were managing some DM551bn of the securities-based/money market-specialised investment funds volumes (cf. Table 4).

In the first place, it must be noted that in 1997, the securities-based/ money market-specialised investment funds market once again saw huge growth: the entire funds volume of the securities-based/money market-specialised investment funds rose from DM393bn at the end of 1996 to DM551bn at the end of 1997, a rise of DM157bn, or 40%. The number of funds increased by 547 funds (the minor difference in the number of funds compared with the Bundesbank statistics can be explained), or 18.5%, from 2,952 at the end of 1996 to 3,499 securities-based/money market-specialised investment funds as at the end of 1997 (Bundesbank has 3,492).

In this market, which in overall terms is growing strongly, the relative sizes of the different investor groups show almost constant trends, as follows:

The insurance industry and institutional pension funds still constitute the most important investor groups, with a share of specialised investment funds volume in excess of 53%; this share has increased not only in absolute terms (+DM90bn specialised investment funds placements; this increase is almost double the level of the previous year), but, as in previous years, has also increased in relative terms in proportion to the other specialised investment funds holder groups.

The second most important investor group of business enterprises can be subdivided into two distinct subgroups:

What are known as the banks' own security deposit funds, with 21.7% of the specialised investment funds volume (or in absolute terms DM38bn new specialised investment funds placements), in which the savings banks and co-operatives sector institutions are particularly strongly represented.

Those business enterprises with a 17.0% share (compared with 18.3% the previous year) of the specialised investment funds volume, whose specialised investment funds placements serve largely as 'capital with social aspects', that is, the 'funding' for pension provisions. In absolute terms, receipts of these specialised investment funds placements were still DM22bn up, compared with DM12bn the previous year.

Although the relative share of the group of other possible specialised investment funds investors fell to 6.1%, in absolute terms the total sum invested increased by almost DM8bn (previous year +DM5bn, wit h a similarly declining relative share).

Although placements in specialised investment funds by the social insurance institutions group fell sharply in relative terms to 1.4%, in absolute terms these investments still grew by around half a billion Deutschmarks.

Only the group of foreign specialised investment fund holders, whose share in specialised investment fund placements fell sharply to 0.6% in relative terms, also recorded a decline in specialised investment fund placements of around DM170m in absolute terms in an overall growth market. Nevertheless, as at 12/97, of the 31 securities-based specialised investment funds which are held by non-German investors, most of them, 29 in number, are equity and mixed specialised investment funds, which volume-wise constitute 81% of the foreign-held specialised investment funds. So those investors, who are aware of what are referred to as the 'hidden attractions' of the specialised investment funds for foreigners, particularly with equity commitments in Germany, are also taking full advantage of these benefits.

Nevertheless, it is still quite astonishing that the proportion of non-German investors in specialised investment funds remains so tiny.

Explicable relatively minor variations from Bundesbank statistics

The investigation of the structure of the specialised investment fund holders is linked in Table 5 with the analogous Bundesbank table which has been published since May 1993 in such a way that the parallel nature of the tables is easily discernible.

Nevertheless, this year, too, it is obvious that there will be a few relatively minor differences between the results of the (author's) survey and the corresponding Bundesbank statistics; however, these may be explained internally.

In the first place, it must be emphasised that the author's survey received responses from 3,499 securities-based/money market specialised investment funds in existence at the end of 1997, with a funds volume of DM550,801m, whereas the Bundesbank capital market statistics show 3,492 securities-based/money market specialised investment funds with a funds volume of DM550,616m; these relatively minor differences may be ignored. The difference is already made clearer in individual items, eg the specialised investment funds held by foreigners, which were reported to the author as at 12/97 with DM3,397 m, but in the Bundesbank statistics the figure was DM4,795 m, that is, 41% higher; not quite so large, but nevertheless still too glaring, is the difference in the figure for other licensed specialised investment fund holders, which were reported to the author to have a calculable fund volume of DM33,675, although the Bundesbank shows them at DM27,245m, lower by DM6,430m, or almost 20%. All other items in the corresponding Bundesbank statistics show variations from the author's survey results - if the specialised investment fund holders, which are differently aggregated there, are regrouped or assembled accordingly - of less than 5% in each case. Variations which, given the amounts concerned, are tolerable.

Market shares of specialised investment fund providers

Once again, the insights shown by the distribution of the investment trust company ITC groups' market shares as at the end of 1997 are informative (see Table 6): with the volume of the market as a whole surging ahead by around 40% (previous year +28%), the previous trends of the relative shifts in market share are continuing. The specialised investment funds volumes of the ITCs of the major/regional and private banks may be growing strongly, but just below the levels of market growth (+34 and +38.4% respectively), which means that in relative terms market shares are falling back slightly.

What is surprising is that even the volumes of the investment trust companies of the savings banks/ regional banks (Landesbanks) fall into the same category: strong volume growth, certainly, but below market growth levels; which is why for the first time in many years the marketshare of the ITC group of the savings banks/ state banks is in relative decline (from 18.9% in the previous year to 18.6% at the end of 1997). This reverse trend seems to have its origins in the saturation of the savings bank sector own security deposit fund market (cf. Tables 8 and 9), although the rate of setting up new specialised investment funds in this particular ITC group is in any case well above the already high branch average. Stronger than the market as a whole, as can be seen clearly in Table 7, was the growth in volumes in 1997 of the specialised investment funds of the investment trust companies of the co-operative sector, insurance interests, foreign bank subsidiaries and others. This is also shown clearly in the new issues of specialised investment funds: these growth rates were particularly noticeable in the investment trust companies of the co-operative banks (volume almost +43%, number of funds almost +49%), and even more marked among the investment trust companies, which are insurance interests (volume +59%, number of funds almost +24%), and among the ITC group of the foreign bank subsidiaries (volume +53%, number of funds almost +30%). In the 'others' group, the special influence of a new market launch (Deutsche Postbank ITC) is conspicuous. The market launch of two other investment trust companies (one of which is only a relaunch) has, however, (as yet) not had such marked effects. The trends which had already been presaged the year before, namely stronger growth than the market as a whole in the ITC groups of the co-operative banks, insurance interests and foreign bank subsidiaries therefore not only continued in 1997, but were actually intensified. The same development as in the years before (considerable growth, but not as strong as the market growth) may also be seen among the ITC groups of the major/ regional banks, and of the private banks, while the set-back in the development of the ITC group of the savings banks/state banks came as a surprise: above-average growth in the fund numbers, but relatively low volume growth compared to market growth rates, and thus in relative terms slightly declining market share in the funds volume of the specialised investment funds - which may in any case naturally be connected with the fact that their own security deposit funds according to the rules predominantly represent bond funds and did not therefore 'explode' in quite the same way as did the equity-based funds.

Microanalysis of market shares by ITC groups

The view of the global market share is even more informative if the market segments are arranged with the individual ITC groups and then broken down accordingly, as in Table 9. However, it has been taken into consideration that in the ITC groups of the co-operative banks, firstly, and secondly of the 'others', there are only a few ITCs in each, of which again in each case one or two dominate in terms of volume in such a way that individual conclusions may be drawn. With the classification of market share on the basis of structure of the specialised investment funds holders (Table 4) to the ITC groups as defined in Table 6, both of the ITC groups referred to above (co-operative banks and 'others') have therefore been omitted.

Even if only 89.3% of the whole specialised investment fund volume is included in the survey, Table 9 nevertheless provides some surprising insights, because for each ITC group observed, the whole fund volume of the relative ITC group is recorded and hence the comparison with previous years is possible.

Moderate, but notable shifts

The shifts in the investor structures for each of the ITC groups in 1997 are not especially large compared to 1996, but the following points nevertheless stand out:

1.The insurance industry is naturally most strongly represented 'among its own kind' with its specialised investment funds, and then among the ITCs of the private banks, and then among those ITCs which are foreign bank subsidiaries, and penultimately among the ITCs of the major and regional banks. The proportion of specialised investment fund holders which are attributable to the insurance industry is in relative terms smallest among the ITC group of the savings banks/state banks, and declined further in 1997. The same is also true of this category of investor among the ITCs of the major and regional banks, too. Otherwise, the proportion of insurance enterprise specialised investment fund holders has generally increased to a greater or lesser extent.

2.The fact that the specialised investment fund holders (German) social insurance institutions do not appear in the ITC foreign banks group is no surprise, but rather the fact that the number of social insurance institutions which are specialised investment fund holders in the ITC groups of the major and regional banks, and also the private banks, turns out to be above average, albeit declining in relative terms in 1997, while in the ITC group of the state banks and savings banks the number is below average, but in-creasing in relative terms in 1997.

Among the ITCs of the insurance interests, the proportion of specialised investment funds of the social insurance institutions is not only above the branch average, but in 1997, compared with the previous year, the proportion also increased in relative terms, completely contrary to the trend.

3.Institutionalised pension schem-es continue to be strongly represented in the ITC groups of the major and regional banks, and also the private banks, but also constitutes the strongest group of investors, in higher than average relative terms among those ITCs which are foreign banks. The likely conclusion from this is that those institutions which wish to invest more outside the EC/EEA are therefore particularly strongly represented here because they wish to 'buy' expertise in foreign markets from the foreign parent companies of the ITCs. What is really striking is that investors from the institutionalised occupational pension schemes, which on average comprise 15% of the specialised investment funds holders, represent almost 24% of the specialised investment funds holders (determined by funds volume) among the foreign bank ITCs, whereas this group of investors is relatively markedly under-represented among the ITCs of the savings banks/state banks and of the insurance interests.

4.The most striking fact, however, is the recent change in structure of the business enterprise specialised investment fund holders, and within this group under the category of 'credit institutions, own security deposit funds': foreign bank ITCs sustained a clear setback in this branch of investors in 1997; the proportion of insurance ITCs also remains small and in decline among this investor group. ITCs of the major and regional banks, and the private banks, may be on the increase in relative terms among this investor group (while remaining well below the branch average), but among the savings bank/state bank ITCs are seen in a clearly ambivalent light: the strong position among this investor group may be maintained, although the proportion of own security deposit funds is in strong decline; this means that the ITC group of the savings banks/state banks with its 166 new specialised investment funds in 1997 operated with particular success principally in the group of business enterprises which are not credit institutions (savings banks).

5.Among the other possible specialised investment funds holders the role of the major and regional bank and private bank ITCs continues, despite falling relative shares, to stand out. The other three ITC groups observed have below average representation in this market segment, although the savings bank/state bank ITCs as an individual ITC group are showing an upward trend in this specialised investment funds sector.

6.Dominant - though not surprisingly - in the small business segment of foreign specialised investment fund holders is the ITC group of the foreign bank subsidiaries: even despite the general decline of this market segment, there is some growth in this particular part-sector. In this respect the decline in the proportion of this investor group to the market average among the major and regional bank ITCs is remarkab le, while the private bank ITCs have been able to hold onto their above-average share of foreign unit-holders. The ITC group of the savings banks and state banks is below average only among those specialised investment fund holders which are not represented at all by the insurance ITCs.

In any event, the microanalysis of the business enterprises/credit institutions specialised investment fund holders shows clearly for each ITC group that the savings bank/state bank ITC group is making huge efforts (and in the second consecutive year these are already showing some signs of success) to divest itself of the image of an intra-group specialised investment fund service provider.

Digression: average size of specialised investment funds per ITC group

In this regard, however, the following point is interesting: the average size per securities-based specialised investment fund across the entire branch as at 12/97 (according to Bundesbank statistics funds volume DM550,387m, 3,489 securities-based specialised investment funds) is DM157m: the analogous figures for the different ITC groups can be seen in Chart 3. These figures mean that the volumes of the securities-based specialised investment funds of the ITCs of the private banks, as well as the major and regional banks, are close to the average; the volumes of the specialised investment funds of the insurance interests are clearly above average, those of the specialised investment funds of the ITCs of the foreign banks, savings banks/state banks and co-operative banks clearly below average. The volumes of the specialised investment funds of the 'others' ITC group constitute a peculiarity which must be seen for what it is.

Specialised investment funds analysis for insurance enterprises/pension funds

If the analysis is done from the 'other side', because and to the extent that this is possible through the publications of the Federal Supervisory Office for Insurance Enterprises [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/burial funds, Tables 11 and 12 provide some interesting insights. This insurance enterprises/pension funds/burial funds investor group owns more than 50% of the specialised investment fund volume, which agrees 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 (cf. Table 10). In the interim (from 1990 to 1994), 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.

Here, the following critical points may be made:

The discontinuation of the practice of showing the securities-based specialised investment funds under their own heading after 1995, because of the BAV statistics, was still disadvantageous for the analysis of the capital investments of the German insurance enterprises which were managed on a funds basis. In view of the insurance enterprises' '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 specialis-ed 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. Investing through investment funds open to the general public, insurance enterprises, as unit holders - legally - do not have this control and interference 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/burial funds is self-determined or determined by outside factors.

In any event, in view of the significance of the specialised investment funds for the insurance enterprises/pension funds/burial funds investment group, the following summary can be made:

- A good 15% of total investments by insurance enterprises/pension funds/burial funds are invested through investment funds as of December 1997 (previous year 13.04%) and most of these, almost 14% of total investments as at the end of 1997, in securities-based specialised investment funds (previous year 11.74%).

- If the heading of securities (that is equities, fixed-interest and fund certificates), which are in any case only those assets suitable for fund certificates, is taken as a reference basis as at the same date in December 1997 (in parentheses figures as at December 1996), the corresponding reference figures as at December 1997 are as follows: 45.99 (40.02)% of securities-based investments are certificates from securities-based investment funds, most of which, in December 1997 exactly 41.39% (in December 1996 37.82) of securities-based investments were certificates from securities-based specialised investment funds.

- If the sales receipts for the year 1997 among the securities-based/ money market specialised investment funds according to the Bundesbank capital market statistics are set in relation to the corresponding net receipts 'units in securities-based investment funds' or according to the new category 'investment units' with insurance enterprises/ pension funds/burial funds in accordance with BAV publications, the significance of the insurance enterprises in the broadest sense for the investment medium securities-based specialised investment funds once again becomes clear (cf. Table 11). Once again in 1997 the lion's share, more than 40%, of the net sales receipts of securities-based specialised investment funds was derived from the insurance enterprises, pension funds and burial funds which are subject to BAV supervision.

- In 1997, this investor group once again recorded respectable growth rate of around 67%, compared to what had flowed into securities-based specialised investment funds on balance the previous year, and the trend towards new specialised investment fund issues by the insurance enterprises/pension funds/burial funds investor group, which has been rising steadily since 1994, is in absolute terms even more impressive: DM13bn in 1994, DM15.8bn in 1995 and DM28.9bn in both of the following years, but DM43.4bn in 1997. This growth of new investments in securities-based specialised investment funds by the insurance enterprises/pension funds/burial funds investor group clearly highlights the sustained positive effects of the BAV circulars R4/95 and R7/95, as these were already analysed and emphasised last year in the annual specialised investment funds analysis by the author (Zeit-schrift für das gesamte Kreditwesen; 15 August 1997; issue 16/97).

The enormous new influx of funds into the securities-based specialised investment funds from the insurance enterprises/pension funds/burial funds investor group is also confirmed by the Bundesbank statistics (although these are somewhat differently structured, cf. Table 13): the DM47.6bn shown there include the BAV figure of DM43.4bn.

Gradually, however, the message implicit in the BAV circular 4/95 is taking root among institutional investors; according to this, the insurance enterprises/ pension funds/ burial funds which are subject to VAG supervision are also able de facto to invest the whole of their tied assets in specialised investment funds, if these are skillfully spread, for example 30% in equity-based or mixed specialised investment funds, 45% in 'pure bond-based specialised investment funds', and 25% in real estate specialised investment funds.

Current values and book values of specialised investment funds of insurance enterprises/pension funds/burial funds

In a cross-checking excercise, taking 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 specification of Table 10, with the addition of details from VerBAV 4/98, together with Tables 4 and 5, the f

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