Hugh Wheelan looks at the Kandlbinder report

The explosive growth in German 'Spezialfonds' shows no sign of ending, according to a report by Hans Karl Kandlbinder, a recognised authority on these tax-advantaged funds (see box).

The report shows net receipts into the funds breaking all records in 1997 at DM107bn ($60bn), 71.6% up on the previous peak year, 1996. This investment thrust has led to a spectacular leap in the volume of 'Spezialfond' assets, from around DM400bn at the end of 1996 to over DM555bn by end-1997, and the boom is not abat ing this year, with figures of DM662bn already recorded by the end of May. Indeed, this figure shows an average increase of just under DM2bn a month on 1997's rise.

The 'Spezialfonds' represented an overall share in Germany's investment trust market of 77.3% for 1997, and dwarfed investment into public and property investment funds. These experienced mixed fortunes over the year, with a rise from DM2.6bn to DM 25.1bn (18.1% of the market) for the open public funds, and a fall from DM14bn to DM6.4bn (4.6%) for the public real-estate funds.

On the whole, Kandlbinder attributes the 'Spezialfond' success to the performance of securities-based funds, which have sidelined the impact of money market (DM312m fund volume for 1997) and real estate 'Spezialfonds'. Real estate 'Spezialfonds', though, are making a breakthrough in terms of new investments, providers and holders , he points out.

The volume growth of the 'Spezialfonds' during 1997, standing at DM157.1bn or 39.7%, has also prompted a large proliferation of new funds.

Over the year 550 'Spezialfonds' were set up, a rise of 18.6% on the 1996 growth rate in new funds of 12.7%. Such was the intensity of action in the sector last year, that two new funds were set up every banking day in Germany.

The Kandlbinder report finds no trace of slackening in the pace of this development, with 297 funds set up before May this year, pushing the issuance figure up to three funds per working day.

Investment in 'Spezialfonds' for the start of 1998 is mirroring the rapid upsurge in their number. To May, net receipts averaged DM10.5bn per month, while comparative figures for German investment funds open to the general public stood at just below 40% of this.

A comparison of the fund numbers and volumes in the three main types of investment funds in the securities based/money market sector at the end of May 1998, reveals the dominance of 'Spezialfonds' in the field.

The 447 equity-based investment funds, including mixed funds, open to the public accounted for around 15% of the total funds volume of the sector, at DM146bn. Representing just un-der 17% of the sector were the public open money market and bond funds.

However, the 3,788 'Spezialfonds', with an average volume per fund of DM175m, achieved total funds volume of DM662bn, greatly outstripping their counterparts with 68% of the DM970bn total market.

Asset distribution within the 'Spezialfonds' continued to shift perceptibly during 1997 towards domestic and foreign equities, the report shows, increasing from the 1996 level of 30% to 36% by end-1997, and breaking the 40% barrier by this May.

Similarly, Bundesbank capital market statistics for 1997 show substantial rises in the actual value of the funds themselves, not including the booming receipts, with the same true of public investment funds.

But Kandlbinder warns that this value increase, prompted by the global capital market situation of low bond interest rates and positive equity price trends, should not merit undue attention from fiscal authorities, with the flipside of rising interest rates possible at any time.

Within the Spezialfonds sector itself, the relative sizes of the different investor groups are also showing constant trends.

The most important investor group remains the insurance industry and institutional pension funds, sharing 53% of the total 'Spezialfond' assets. This share has not only increased in absolute terms, up DM90bn on the year and doubling the previous year's level, but also relatively in proportion to the other groups holding 'Spezialfonds'.

Second in fund volume importance are the banks' own security deposit funds, mostly represented by savings banks and co-operatives with 21.7% (DM38bn new investment for 1997).

These are followed by business enterprises, with a 17% portion of the funds, down from 18.3% in 1996, whose 'Spezialfonds' placements serve largely as pension provision funding. Despite the relative fall, these enterprises still increased investment by DM22bn, compared with DM12bn the previous year.

Similarly, although other licensed 'Spezialfond' investors' relative share fell to 6.1%, the total sum invested rose by almost DM8bn, with the same story applying to social insurance institutions, which grew by aroundDM500m but shrank in relative terms to 1.4% of overall assets.

Only foreign 'Spezialfond' holders saw their relative fall to 0.6% accompanied by a drop in investment of DM170m on 1996 levels.

Nevertheless, the report notes, of the 31 foreign held funds, 29 are in equity and mixed denominations, indicating awareness of the so-called 'hidden attractions'in 'Spezialfonds' for foreign investors, particularly those with equity commitments in Germany. But this does not explain why the proportion of foreign in-vestors in the funds is so small, Kandlbinder adds.

Another surprising element of the statistics is that, despite strong volume growth in 'Spezialfonds' by the investment trust companies (ITC) of the savings/state banks, these still fall below market growth levels as a whole of 40%.

This relative decline from 18.9% to 18.6% of market share appears to originate from the saturation of the savings bank security deposit fund market, with the creation of funds in this sector well above the average, the report says.

Contrarily, the 'Spezialfonds' of ITCs in the co-operative sectors, insurance interests, and foreign bank subsidiaries, were all stronger than the market as a whole, with volume increases of between 43% and 53% and an increase of fund numbers ranging from 23% to 49%.

Overall, it is noted, this difference could also be connected to the fact that ITC groups of savings/state banks predominantly represent bond funds, and therefore are not sharing the 'explosion' of equity-based funds.

In terms of investor structures within the ITC groups, the report notes the trend of institutionalised pension schemes for higher than average investment in foreign bank ITCs; the likely conclusion being that institutions seeking to invest outside the EC are buying expertise from the foreign parent companies of these ITCs.

Kandlbinder also highlights the major advantage for groups such as insurance companies with 'Spezialfonds' over public funds, as the possibility of intervention in the investment policies of the ITCs, not permitted in the latter. This has particular resonance when considering the consequences of the Asian crisis.

The knock-on effect of the German 'Spezialfond' success story, the report also shows, is their strong expansion in Luxembourg.

Figures for 1997 recorded 73 'Spezialfonds' with a funds volume of DM15.6bn, against 43 funds and DM6.5bn in 1996. Surprisingly, some of these funds are being actively promoted by German 'Spezialfonds', with the suggestion being that in the event of any downturn in the German market, it would only be a short step for Luxembourg to become a serious competitor. The dispersion of tax clouds threatening 'Spezialfonds' as Euroland becomes a reality, have also been beneficial to this growth, Kandelbinder says.

In conclusion, Kandlbinder argues there is no foreseeable end to the boom in 'Spezialfonds' as the investment answer for old age provision; a fact he believes should also augur well for real estate and money market 'Spezialfonds'. With the dawning of employee pension funds on the horizon of the scheduled fourth financial markets promotion law, he also suggests Germany may follow the Anglo-Saxon pensions model, proving a further boost to 'Spezialfond' investment. Certainly, he says, the future for Germany's 'Spezialfonds' is bright, irrespective of how the occupational pension fund land finally lies.

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