One of the myths about Germany is that it is becoming less attractive to foreigners wanting to do business. Spreaders of the myth – typically neo-liberal-minded industrialists, economists and politicians – say that unless Germany lowers its labour costs, cuts its taxes and streamlines its bureaucracy, it will attract fewer and fewer foreign investors.
Further liberalisation of its economy would certainly help Germany compete better globally. But it is not true that foreign investors are turning their back on the place.
Instead, these investors are snapping up well-known but distressed companies and turning them around. Foreign hedge funds are becoming major shareholders of Dax-30 companies and behaving accordingly. Remember the triumph of hedge fund TCI over Deutsche Börse?
And as seen in this special report, some foreign asset managers are exploiting opportunities in Germany’s institutional market. That market is rapidly evolving due to a nascent pensions boom and the trend among investors to hunt for better returns and more diversification than German managers can offer.
Because of what is happening with its institutional market, Germany has also become a magnet for leading Anglo-Saxon investment consultants. Just this year, Watson Wyatt, Hewitt Associates and Towers Perrin have established separate investment consulting practices, joining Mercer, which has been in the market for two years. Watson Wyatt even made a big noise by poaching Torsten Köpke, a senior manager from German consultant FERI, to head its new office in Frankfurt.
German investment consulting is, however, an industry still in its infancy, having been born in the mid-1990s. Although there are no hard figures, experts say that at most 20% of institutional investors rely on consultants to help them find asset managers who will hopefully boost their returns. By comparison, 50% of institutional investors in Switzerland and an even higher percentage in the UK use consultants for asset manager searches.
Erik Crawford, a senior investment consultant at Mercer in Frankfurt, observes that growth of the industry is held down by a “strong-do-it-yourself mentality” among institutional clients, particularly pension funds. With almost €500bn in assets, these funds are a main target for consultants like Mercer.
“Generally speaking, the larger the pension fund client, the less likely it will rely on an investment consultant because it has its own capital markets people. Smaller pension funds also might not use consultants, with the justification that the service is too expensive,” Crawford said.
Crawford also notes that because of the prevailing mentality, some clients do not retain consultants but only hire them for single projects, whether an asset-liability study (ALS), advice on the strategic asset allocation or asset manager searches.
Although Mercer has had some impact, local players dominate German investment consulting. Among the main ones are FERI, a consultant that grew out of a family office, FERI’s arch-rivals Alpha Portfolio Advisors and RMC, which does a lot of consulting for foundations and ecumenical organisations. In addition, there are a range of players like Heissmann, the former GSC-PPCmetrics and now just GSC, Fonds Consult, Faros and Rauser AG, which Towers Perrin acquired in July to boost its presence in the industry.
In view of these constraints, is it wise for the Anglo-Saxon investment consultants to follow Mercer’s lead? The answer is yes, though these consultants should not have great expectations.
Consider that many German institutional clients, particularly pension funds, are overexposed to safe but low-returning asset classes like European debt or covered bonds. To better meet their liabilities, they are being forced to diversify more and hunt for better returns. Moreover, many of these clients lack an understanding of the asset classes that could help them with their needs, whether private equity, hedge funds or even exotic fixed income products like emerging market and high yield bonds. This is an ideal situation for any consultant whose specialities go beyond traditional asset classes.
Another ideal situation is the growing trend in corporate Germany toward financing pension liabilities via an external fund instead of – as is traditionally done – balance sheet assets. Consultants can be of enormous help here either in terms of establishing the fund’s asset allocation or in terms of finding the right asset managers. Firms that since 2002 have established external funds for their pension liabilities include Deutsche Bank, Siemens, Deutsche Lufthansa, the engineering group MAN, energy giant E.ON and the media group Bertelsmann.
Finally, although it’s true that many German institutional clients do their own investing, experts say that due to the imperative of meeting liabilities, virtually all pension funds need an ALS, which is a crucial consultant service.
“ALS is a service that pension funds in Germany typically outsource to investment consultants and the reason is obvious. To do it effectively, you need a whole bunch of mathematicians and other such eggheads,” said Hartmut Leser, head of institutional client consulting at FERI in the Frankfurt suburb of Bad Homburg.
“There are a handful of pension funds who have the resources to do an ALS, but I think the warning you see on US television: ‘This was done by trained professionals. Do not try this at home’ very much applies,” added Leser.
Add all this up and the prospects for German investment consulting look bright. Experts like Leser and Herwig Kinzler, Crawford’s boss at Mercer, estimate that in the long run, the share of clients using consultants for asset manager selection could double to 40% from around 20% now.
Mercer’s experience also provides encouragement for foreign newcomers. Since getting started in mid-2003, Mercer has racked up more than €25bn worth of mandates, mostly for asset-liability studies and asset manager searches. Pension funds, including the €30bn giant Bayerische Versorgungskammer, are its biggest client. By 2010, Kinzler aims to take a third of the consulting market and raise his staff to 10-15 from five now.
Even so, competition for newcomers will prove tough amid the predominance of local players. According to Leser, it is not enough for a foreign consultant to tout its international connections. “The client in Münster or in Ulm needs someone who understands his needs and can speak his language. He is not helped much by asset managers in New Zealand or Australia. This is why we believe that we are well positioned.”
FERI had previously said that since its launch in 1996, it had accumulated €200bn worth of mandates. However, industry sources put a big question mark on that figure. They say that FERI’s position has been severely weakened by competition from the likes of Alpha Portfolio Advisors and the recent exodus of senior managers, including Köpke and three partners at Faros.
The newcomers should also be aware that German consultants’ business with pension funds is under attack from asset managers. Eager to win lucrative investment mandates from pension funds, managers like Allianz Global Investors and Goldman Sachs Asset Management (GSAM), have begun to offer such services as ALS. Some German consultants even allege that the managers offer the services for free in exchange for a promise that the client will invest in their funds. The managers deny this allegation and James Dilworth, GSAM’s German head, insists that his house is not trying to compete with consultants.
Still, even if the newcomers disappoint their head offices in the UK or the US by failing to quickly break the German players’ hold on the consulting market, this doesn’t mean that they will pack up and leave. Experts believe that the foreign consultants will remain committed to Germany for the long run, both because of the market’s prospects and because it is inexpensive to maintain such small offices.
“Even if their market share doesn’t increase much, I don’t expect them to give up that easy. Since the market for investment consultants is growing, there is enough room for the new entrants. Moreover, they will have the staying power because running an investment consultancy doesn’t require a lot of overhead,” remarked Michael Montag, head of German institutional business for the Swiss private bank Pictet.