Whenever legislative change sweeps through an investment landscape, the first thing institutional investors have to make sure of is that they are thoroughly informed. And in Germany, consultants are gearing up to advise their clients on the new investment possibilities now beckoning as a result of the Investment Modernisation Act.
“It is a very important subject for us, because the questions of investment and retirement provision are becoming ever more closely linked,” says Joachim Bode, managing director of consultancy Bode Grabner Beye in Munich.
The new law effectively clears the way for pensions and other institutions to dip into a wider pool of potential investments, and when the consultancy carries out the next scheduled asset liability studies for its clients, it will have to take this into account, he says.
But pension funds are unlikely to start requesting that additional asset liability studies are carried out by their consultants just because of the new law. Bode says current practice is for the studies to be carried out on an annual basis, even though the legal requirement is for slightly less frequent studies than this. The broader range of investments now available will be considered within the framework of the next ALM studies, he says.
“One of the most important points of the Investment Modernisation Act was certainly the acceptance of hedge funds within the classes of regulated investments,” says Thorsten Kaspar of Heissman consultants in Wiesbaden. But anyone expecting to see a huge influx of hedge fund offerings on the German market will be disappointed. The marketing of these products within the country’s borders is still subject to restrictions.
In particular, most foreign hedge funds are not able to satisfy the legal requirement for a high level of transparency – even though this is necessary if they are to attract the tax benefits.
“This is why only very few foreign hedge funds have been approved in Germany. Domestic providers, too, are rather reticent at the moment,” he points out.
But investors are very interested in hedge funds and alternative investments, says Kaspar. “Legislators are making efforts to modify investment regulations for insurance companies so that they are allowed to invest more heavily in hedge funds,” he says.
Kaspar says this increasing interest in hedge funds is leading to a greater demand for advice in this sector. “Investors are actively approaching consultants, wanting to add alternative investment types in their portfolio,” he says. “And there is still a strong need for information in this area, because German investors in particular have had very little experience with hedge funds in general up to now.”
In a study it has conducted, Heissman hasn’t been able to see any general preference for domestic investment companies, says Kaspar. “Many investors are actively realising the opportunity to put their investment assets in the hands of foreign investment firms.”
Hertwig Kinzler of Mercer in Frankfurt says that clients generally call on their consultant when they make a change in their asset allocation, or are unhappy with the performance of an asset manager.
“The Act motivates clients, makes it easier to go for new asset classes,” he says. It is possible that clients may call on consultants for advice if they decide to invest in hedge funds, he says.
Uli Kamm of Georg Seil in Wiesbaden doesn’t foresee a noticeable wave of business arising from the legal shift. While it is true that hedge fund investment has been opened up legally, the consultancy was already advising on hedge funds in the past, says Kamm.
Anyway, the law does still need some firming up, he says. “Many people are rather confused about this new law,” he says. There is a requirement within it for investors to change contracts, and these contracts have to be drawn up by the BAFin. “A lot of things are not yet fixed. This is the problem with many laws in Germany – it takes a lot of time before you can use them,” he says.
And the German government has envisaged a relatively long changeover period for the new regulations to be fully implemented. Funds which still adhere to the provisions of the old law are not touched by the new law until 2007. “So they have two or three years to change totally.”
In practical terms, Kamm is sceptical about the level of real change that the investment act has actually brought about, especially given the current cautious climate in the investment world. “This new law doesn’t offer all that many things,” he says. “Probably in Germany, most of the institutional investors don’t have any risk budget at the moment. They have their backs to the wall so they are very bound to the current assets they have… they can’t increase the assets they hold such as hedge funds, so the new freedom is rather limited.
“They new law has come at a time when most pension funds are switching from bonds into Namenspapiere so that they don’t even have the price risk,” he says.
But the master funds which are now clearly provided for under the law, certainly are useful to pension funds. “Every institution which has more than three, four or five Spezialfonds is looking for a master KAG, a master fund.”
With its multi-manager structure, it has huge benefits for investors. “You can change managers very quickly and a lot these also have direct investments,” says Kamm. As long as the investor keeps everything with one custodian, there is also single reporting for everything.
”Investors have different demands when it comes to choosing a consultant,” says Kaspar. “Along with a local presence, they particularly see local expertise as very important – in legal and tax matters.”
In the specialist areas of occupational pensions, for example, long experience and knowledge of
the market and the legal and tax aspect is absolutely vital for clients, he says.