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German Master KVG study predicts growth for real asset markets

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All of the 40-odd German institutional investors Telos surveys annually will be using a Master KVG structure – or centralised administrator – for at least some of their assets by 2017.

In Telos’s 2014 Master KVG study, it cited the advantage of centralised and streamlined reporting, as well as the significantly increasing importance of risk reporting.

Telos said more than 80% of respondents to its survey said they were already using such a service provider compared with 75% in the previous year.

In 2012, roughly one-third of German institutions did not use a Master KVG.

Of those respondents that have not yet hired a Master KVG, half are planning to do so this year, while the other half is aiming to do so in 2016.

But potential for market growth will not end there, according to the survey, as investors are requiring more and more services from their Master KVG.

For one, the number of direct investments included under the mandate in order to achieve a more holistic view of the portfolio is increasing.

One-third of respondents to the survey expressed interest in including direct investments in a Master KVG mandate, while 92% of the surveyed providers are already offering it – compared with 57% the year previous.

Another driver for growth is the inclusion of real estate investments, largely a niche offering for some providers.

Investor interest in this service has grown from 14% in 2013 to 50% in the most recent survey.

Telos said real estate holdings in insurers’ portfolios amounted to “several trillion euros”.

Similarly, other real assets or alternative investments included more frequently in portfolios will have to be integrated into a Master KVG mandate.

Telos noted that, to date, smaller investors have shied from certain asset classes if their Master KVG was unable to include them.

Senior loans, for example, remain a problem, as it is unclear how they are to be labelled under the VAG, the law regulating the supervision of insurers and similar institutions.

This, in turn, means the evaluation and reporting of these assets presents a particular challenge – but one that more and more service providers are taking on.

However, all surveyed market participants agreed there was little room for new providers, as they would have to make major investments to set up the basic infrastructure existing market participants already have.

Instead, existing providers will further widen their service offerings to include asset-liability studies, fiduciary management services or asset manager selection, Telos said.

Less than 40% of investors – and 50% of providers – fear this expansion of services might lead to investors depending too much on the Master KVG.

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