The German fund market has been invaded, or so the numbers would seem to suggest. It is a market that supports 853 locally domiciled funds and nearly three times that number of foreign funds. More precisely, according to Lipper cross-border data, of the 3,753 funds registered to sell in Germany, only 23% are home-grown. The bare numbers, however, do not reveal the full picture, which is one of an invasion that is partly German-led. Over 2,200 of the foreign funds are domiciled in Luxembourg and of these, German companies promote 458. Added together, though, their presence in their home market still accounts for only a third of the entire mutual fund product range available to German investors.
Germany is certainly the hot spot for foreign fund companies and, although the weight of assets and sales rests heavily in favour of the large German banks, competition from outside is building. In the face of this onslaught, can the Germans respond by offering their investment management expertise to foreign institutions?
“Certainly,” comments Rudolf Siebel, director of BVI, the German mutual fund trade association. “The German market is entirely neutral as far as regulations and taxes are concerned. There is nothing to stop any investor, retail or institutional, buying our funds. And, one of the strengths of German funds over competing foreign products is their cost.” According to data compiled by Fitzrovia International, German funds are uniformly cheaper than their foreign counterparts. The average total expense ratio of foreign equity funds is 1.92% compared with 1.15% for the counterpart German funds. The picture is the same in the bond arena where foreign funds offer a total expense ratio of 1.14% and German funds 0.73%. “The reasons for this cost differential are closely linked to the domestic/cross border distinction,” says Paul Moulton, chief executive of research group Fitzrovia. “Foreign funds tend to be authorised for sale in a number of countries so a lot of their fixed costs are considerably higher in terms of legal costs, printing and translation costs for example. Added to this is the fact that domestic funds have ready-made distribution channels. In order to compete, foreign groups are forced to use alternative intermediary channels, which demand higher sales commissions and trailer fees. Finally, banks with proprietary funds dominate German fund provision. Mutual funds form part of a wider overall service on which charges may also be levied. In other words, the margins required from fund business can be lower.”
The range of German funds available is now extensive, and comparable in terms of innovation with the best of the well-known international players. No longer can the German fund houses be accused of being solely focussed on bond and plain vanilla products. Five years ago, bond funds accounted for 50% of investment with equity trailing at less than 14% of the market. Today the position has almost entirely reversed with equity funds accounting for 48% of assets, compared with 24% invested in bonds. The tech stock fever hit Germany with the strength of a tornado, encouraging further fund innovation and increased awareness of equity investment. It is not just a case of fashion; the trend is a long term one and the BVI’s Siebel is happy that the equity culture will stay. “Our data history is limited,” he says, “but our experience to date indicates that investors understand the long-term nature of equity investment and are not withdrawing when market performance gets bearish”. This in turn encourages the development of investment management experience in an increasingly sectorised market.
German funds offer variety at attractive prices, but how do they compare in performance terms. “The data is inconclusive as you might expect” says Michael Stammler, head of FERI Trust, the leading German fund research house. “It is really impossible to point to a particular cultural strength because each company is different and for different time periods they will have a varying range of good funds. Equally, though, it is fair to say that the good funds compare very well with their foreign competitors”. Our table lists the leading funds by their five year performance in the German equity and Global equity sectors. and shows the FERI rating. This rating essentially measures performance consistency and risk factors - an “A” rating indicating a fund that consistently (over five years) offers top quartile performance at relatively low risk. In the German equity sector one would expect the German groups to dominate as indeed they do, although surprisingly the top two positions are taken by Barings and ABN Amro, with Barings being the only fund to attract FERI’s “A” rating. On the other hand, the German groups also dominate the the global equity sector where a stronger foreign presence might have been expected. The leading fund is a German domiciled offering from the Swiss giant UBS but, with the exception of the AIBC Luxembourg fund, all others are from German groups.
The opportunity exists to attract institutional mandates but German companies start with a cultural disadvantage. “Germany has for long been a very closed market where competitive institutional mandates didn’t really occur”, summarises market consultant Anke Dembowski. “German companies just do not have the experience or the dedicated staff to deal with the extensive RFP questionnaires that are integral to the institutional selection procedure”. For a market that is fundamentally a retail market, the role of consultants is just beginning to develop and fund groups have been heard to complain that amongst the leading names are many that have little experience or knowledge of the fund business. They do not therefore know who to take seriously. The net result is that the RFP process is often delegated to junior person without the authority to extract appropriate answers from senior management to the more penetrating RFP questions. Not only this, but RFPs are very often delivered in English putting the German companies to a further disadvantage. The Anglo-Saxon groups have considerably more experience in dealing with institutional business and have dedicated teams with standard presentations ready to respond to RFPs. “This is not just a German problem” explains Denis Bastin, senior consultant in the management advisory team of William M Mercer, “it affects all Continental European players and operates from both ends of the institutional business chain. The asset managers suffer from the language problem and the lack of emphasis on institutional business but institutions initiating the mandates perceive the Continental players to be skilled in the low value-added fixed income arena.
German asset managers are standing at a development cross-road. Their traditional market franchise has attracted a high level of foreign competition. Their response, to date, has been reactive and focussed on the retail market. The opportunity exists for the Germans to become serious institutional players in Europe by re-focussing attention on institutional business. “There is a growing awareness of the importance of institutional mandates” concludes Bastin, “but there is still an inclination to see it as a necessary evil rather than a huge business opportunity”.
Diana Mackay is managing director of European Fund Industry Services in London