You can reap more than mere dividends if you're clever with equities.

This is the message some progressive asset managers have been trying to get across to the more conservative guardians of Germany's pension assets.

And the response has been relatively swift. Between 1995 and 1996, the average allocation of shares in Germany's Spezialfonds rose to 30% of total assets from 25%, according to Bundesbank data. Domestic shares increased their slice to 21% from 19%, while foreign shares climbed to 9% from six.

Spezialfonds are a type of exempt investment fund designed specifically for the institutional and corporate markest. Pensions assets make up 40% of all Spezialfonds assets.

Munich-based Hans Karl Kandlbinder, independent investment adviser, says there may have been even more of a shift towards shares for pension funds in the last year. Pension funds are getting more risk-positive in comparison with before... this is just starting," he says.

In his new report on the boom in Spezialfonds, Kandlbinder shows that in the first few months of this year, equities have became an even more significant asset class.

Citing the latest Bundesbank data for the end of April 1997, he shows that by this point, shares made up almost 33% of assets held in securities-based Spezialfonds. Foreign shares accounted for 10.1% of the asset mix while domestic shares made up 22.8%.

Domestic bond weightings fell to 49.8% by the end of April 1997, down from 53% at the end of 1996. At the end of 1995, this asset class had made up 56%. Foreign bonds were slightly higher at 9.8% of total assets this April. Money market instruments made up 0.3% while cash and other investments accounted for 7.2% of all assets.

Ascertaining exactly where the DM510bn ($280bn) of assets be-longing to Germany's occupational pension schemes are invested is notoriously difficult. But experts believe a look at how Spezialfonds are invested can give a good picture of pensions asset allocation. Around DM120bn of pensions assets were invested in Spezialfonds last year, according to Commerzbank Investment Management figures.

German occupational pensions are largely book reserve schemes, where reserves are built up in the company's balance sheet and the money is in-vested in the sponsor company itself. After World War II, German industry had to rebuild its capital stock and this was a relatively cheap way of doing it. Book reserve schemes are still popular because they offer tax advantages and access to long-term capital. Less than a quarter of occupational pensions assets were invested outside the sponsor company last year.

Some companies transfer their pension funding to a Pensionskasse - a quasi pension fund, which is subject to insurance legislation - and this may in turn use Spezialfonds as its investment vehicle.

Claus Sendelbach, director of Commerzbank Investment Management, says average asset allocation is now swinging towards shares in a very direct way. "Some years ago we talked about 10-12% in equities, mostly domestic...but now because of low in-terest rates and high returns in equities, this is up to 30 and even 40%,"" he says.

Pensionskassen are legally restricted from investing more than 30% of pensions assets in stocks. But this still leaves room for some Spezialfonds portfolios within a pension scheme to have a higher proportion than this, as long as the overall proportion comes within the set limit.

Sendelbach says Commerzbank Investment Management has had some success in persuading pensions clients to up their stocks weightings, by demonstrating the high potential returns gained from stock picking and timing.

The reluctance of pensions guar-dians to hold high proportions of shares stems from a conservative tradition, says Peter Warrington, director of the WM Company, the performance measurement company which has an operation in Frankfurt.

"It is the cultural and historical practice - they see equities as being risky and bonds as being safe," he says. The Bundesbank, which regulates the bond market, is trusted by everyone. Very few individuals in Germany own shares, and there is a lack of media attention paid to equities, Warrington says.

Pensionskassen hardly use equities as investment instruments because the regulations are still too restrictive, according to Deutsche Bank Re-search. They are unable to offset the 25% corporation tax credit on dividends. If they invest in shares via Spezialfonds, they can offset this, making returns a third higher.

But the real reason why pensions in-vestment in equities is so low in Germany is that there are simply not enough shares on offer, according to Diethart Breipohl, member of the board of directors at Allianz, Germany's biggest insurer. Direct insurance schemes account for 12% of the German occupational pensions market. Allianz and other insurers would happily invest more heavily in German shares if there were a broader and more liquid range of shares on offer, Breipohl was quoted last month as saying.

German pension schemes are in dire need of higher investment returns. The country's ageing demographic profile means that pension contributions will have to rise to around 40% in 2030 from 20% now if investment yields remain the same.

The stock market could go some way towards satisfying the need for higher yields. German funds were able to achieve average returns of around 25% on their equity holdings in 1996. The German DAX index is already up around 37% so far this year.

The legal restriction on equity investment for pension schemes may not be holding anyone back. But this ceiling could change as part of the next piece of legislation aimed at promoting Germany's financial markets -- the third Finanzmarktfoerderungsgesetz - to be rubber stamped at the beginning of next year. Precisely what will be contained in the bill is not yet certain.

Pensions asset managers are also busy looking towards the introduction of the single European currency, which could arrive before the the millennium is out. In 1995, Deutsche Bank Research asked Germany's 40 largest Pensionskassen what proportion of foreign equities they held, and more than half of respondents said they held none at all. Where pensions assets are invested abroad and outside Europe, the popular location is the US, says Warrington.

"The currency problem was the main one over the last few years," says Sendelbach. "It was very risky to invest in foreign currencies. Our currency was very strong and you lost money - certainly against sterling. If you had bad luck and your currency overlay was wrong, then you lost a lot of outperformance."

With the advent of a single currency, German pensions asset managers would switch their equity strategy to a European sectoral approach. This would open up some interesting in-dustrial sectors for German investors which are now too narrow, such as telecommunications, Sendelbach says.

Rachel Fixsen is a freelance journalist"