Flying through turbulence
Being the market leader is not always a bed of roses. Consider US software giant Microsoft. In dominating the global market for PC operating systems since the early 1980s, it has provoked much jealousy and enmity. For all its success, Microsoft has had to deal with threats as serious as anti-trust lawsuits or virus attacks on its software.
Feri Institutional Advisors (FIA), a German investment consultant, has never faced anything like anti-trust lawsuits or virus attacks. But like Microsoft, FIA is discovering how much pressure one can face at the top.
FIA was launched in 1996, when its parent Feri Finance, a private wealth manager, decided to bring investment consulting to Germany’s institutional market. Feri was not alone in this but accompanied by German firms Alpha Portfolio Advisors and RMC.
A decade later, FIA has emerged as the market leader, advising on €305bn in institutional assets. Three-quarters of FIA’s volume is from German pension funds, which use consultants for up to a third of their allocations. But unlike Microsoft, which was never seriously challenged in PC operating systems, FIA finds its dominance under attack from domestic and international consultants. And as players see that FIA is vulnerable, some have, in
part, been trying to further undermine it by speculating.
The speculation has centred on three questions: First, can FIA cope with the recent exodus of several
high-profile consultants? They include Hartmut Leser, a former managing director who helped build the business and Torsten Köpke, a senior consultant who left in mid-2005 to head Watson Wyatt’s new Frankfurt office. Köpke also took two consultants with him.
Second, has FIA lost any clients due to the exodus? And third, is MLP, a listed independent financial adviser that took a controlling stake in Feri Finance last September, committed to the consulting business even though margins are slim?
To spark the speculation, some of FIA’s rivals have answered these questions in the negative. On the first, an unnamed consultant told German business daily Handelsblatt: “We have job applications from Feri employees and from what we hear, more are considering leaving.” On the second, Handelsblatt quoted two more unnamed consultants as saying: “From our discussions with institutional investors, we have the impression that FIA is losing clients.” And on the third, Georg Seil, chief executive of an eponymous investment consultant, told the newspaper: “MLP has no use for Feri’s institutional consulting arm.”
Such speculation makes for an absorbing story, but, so far, there has been no hard evidence to back it up. On the contrary, FIA has managed to defend its lead position in Germany despite the onslaught and the speculation.
Interviewed by IPE, FIA chief executive Arnd Thorn said that to replace lost staff, FIA had added five consultants in the past year. “That means we have 25 consultants offering the full range of services, from asset-liability (A-L) studies to advice on asset allocation to asset manager searches,” he said.
Meanwhile, FIA’s total staff - to include those in sales, sales support and back office - has increased to 51 from 44 a year ago. Quite apart from losing clients, Thorn also said FIA had acquired
20 new ones since the start of 2006. This brings the total number of institutional assets advised on to €305bn.
Finally, FIA’s CEO insisted that MLP’s acquisition of a 56% stake in Feri Finance was only good news. “We were convinced in our conversations with MLP before the deal that they were committed to the institutional consulting business. Now, together with MLP, we will step on the gas pedal,” said Thorn, who, along with Feri’s other partners, own the remaining 44% stake in the firm. MLP has the option to purchase that stake in 2011.
Thorn’s comments were backed up by MLP. “Feri will continue to run its business independently of ours. We are committed to letting it further expand its business and if investment on our side is needed for that, we certainly will support necessary measures,” said Ulrich Stephan, board executive at MLP in charge of asset management.
While FIA is still the market leader, it is not as predominant as it was several years ago. One reason is arch-rival Alpha, which has won over many of FIA’s target clients -namely bigger pension funds and corporates. Between January 2005 and September 2006, the German consultant won 45 mandates for asset manager searches, representing an underlying allocation volume of €3bn. This is one of the highest figures known in a market that is still largely opaque.
According to Christian Schlenger, Alpha’s co-founder and managing partner, the searches were not just for equities and bonds, but also for alternatives like hedge funds. To deal with the rush of new business, Schlenger added that Alpha would soon expand its team of consultants to 10 from eight now.
Other German consultants like RMC, Faros and Georg Seil pose a more minor competitive threat to FIA. This is because they mainly pursue smaller institutions, whether pension funds, foundations or church-related organisations. But they have bagged bigger mandates too. One example is Frankfurt-based Faros, started in late 2003 by former FIA consultants Uwe Rieken and Rainer Buth. Faros’ bigger clients include VBL, a €12bn pension fund for public sector employees and the €2.7bn scheme for German chemical firm Degussa.
When not battling Alpha or brushing with smaller houses, FIA has had to contend with a second front opened up by foreign consultants. They include Mercer, which entered Germany’s consulting market in mid-2003, as well as Watson Wyatt and Towers Perrin, which did so in 2005.
Like FIA, these houses target bigger institutional clients and are particularly interested in so-called CTAs - newer pension funds created by listed German firms, including many on the blue-chip Dax index. In fact, a boom in CTAs has generated at least €20bn in new pension assets just this year. Foreign consultants also argue that due to their international connections and expertise, they have more to offer investors in terms of diversification and opportunity than domestic ones.
Of the foreign houses, Mercer is farthest along, having racked up €25bn worth of mandates, including asset manager searches and A-L studies. By 2010, Herwig Kinzler head of Mercer’s Frankfurt office, aims to take a third of Germany’s investment consulting market and raise his staff to 15. Meanwhile, Watson Wyatt recently said that over the past year, it had won €1.3bn worth of mandates for asset manager searches, adding that the figure would rise to €3bn by June 2007.
Still, as FIA’s performance over the last year reflects, the German consultant refuses to cede territory. It has even launched a counterattack by hiring more consultants, slightly amending its business model and expanding into other European markets.
Beyond the staff already brought on board, Thorn said FIA would hire two more consultants for its co-operation with Heubeck, a well-known German actuarial and pensions firm. Due to Heubeck’s close ties to German pension funds, the co-operation has been a crucial source of client acquisition for FIA and, indeed, is one reason why it is today’s market leader. With the new hires, the FIA team dedicated to the co-operation will increase to seven, including MD Rainer Dietz who is team leader.
Regarding its business model, Dirk Söhnholz, an MD responsible for alternative investments, said FIA would henceforth take an “implemented consulting” approach. This means, for example, that FIA will cease offering A-L studies at any price. “If a client says to us, I can have a study done for €10,000, then we might have to say: Sorry, but we can’t compete with that. Our priority is to offer a high-quality and comprehensive study,” Söhnholz said in Bad Homburg, where Feri is based.
Finally, FIA wants to further grow its business by expanding into foreign markets where there is huge demand for external investment advice. At the beginning of 2006, it began offering consulting to Swiss institutional clients, albeit without opening an
office. Last summer, it also signed a co-operation deal with Compendeon, a newer Dutch consultant. According to Thorn, FIA also is looking to do business in Scandinavia via a partnership with a local consultant.
Back on the home front, FIA is not impressed with Mercer and Watson Wyatt’s claims that their international connections grant them an advantage. Observed Leser prior to his departure from FIA: “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.”
Leser’s point was partly conceded by FIA’s international rivals. “It’s true that as long as German institutions maintain a heavy local bias, domestic consultants will probably do just fine,” said Zeljko Tipuric, senior consultant at Watson Wyatt. To appreciate the bias, consider that many German pension funds are between 60% and 80% invested in fixed income, nearly all of which is investment grade paper like Pfandbriefe, or German covered bonds.
On the other hand, Tipuric - one of Köpke’s recruits from FIA - stresses that the prospects for foreign consultants in Germany have never been better. “German institutions are increasingly diversifying their portfolios and looking abroad for better returns. Otherwise, we and other foreign consultants would not have gotten off to such a good start,” he said.
Due to what Mercer describes as a strong “do-it yourself” mentality to investing, consultants will probably never dominate the pension fund market as they do in Switzerland or the UK, where they advise most of the schemes. But reliance on consultants, the highest among German pension funds, is growing steadily from a third of allocations currently.
Experts like former FIA MD Leser have also said that use of consultants by the broader institutional market - to include insurers, banks, foundations and ecumenical organisations - will double in the near future from about 10% of allocations now. Hence, FIA stands a good chance of remaining number one in the market if it continues to advise diligently and if MLP stays committed to the business.
Some market players question that commitment. “FIA is now owned by MLP, a listed company. Margins in the consulting business are not high, so MLP could come under pressure from its shareholders to dump it if it poses a drag on its overall profitability,” said one Frankfurt consultant who spoke on condition of anonymity. MLP recently disclosed a 38% hike in pre-tax profit for the first nine months of 2006. In doing so, it has set a precedent for the kinds of returns it aims to deliver to shareholders.