Nina Röhrbein speaks to one of the asset managers trying to introduce fiduciary management to Germany
Fiduciary management may have started in the Netherlands and moved to the UK, but for one asset manager its future lies in Germany.
The origins of Pioneer Investments’ German fiduciary management activities go back to 2002, when Activest - prior to its acquisition by Pioneer - started running its first Master KAG vehicle for larger corporates in Germany.
The master KAG vehicle itself was established on 6 December 2001, when the regulator permitted German investment companies, known as KAGs, to outsource specified processes. The concept allows KAGs to hold several sub-funds within one Spezialfonds vehicle and connect third-party asset managers from a legal and operational point of view.
On the back of that model, Activest started offering multi-asset, multi-manager fund solutions within a comprehensive risk management and fund reporting framework.
Pioneer inherited this model when it took over Activest in 2006 as part of the acquisition of Hypovereinsbank by Italy’s Unicredit. The asset manager already has traditional large clients for whom it runs multi-asset solutions including risk management and client reporting for their entire master KAG. In 2007 it fully outsourced its back office to fund administrator Société Générale Securities Services (SGSS).
Given the strict German regulations, full outsourcing, as seen with fiduciary management mandates in other countries, is not an option.
“A full legal outsourcing to a sub-delegated fiduciary manager is unlikely to happen,” says Oliver Bilal, managing director at Pioneer in Munich. “Institutional investors under German insurance regulation have to have full control and oversight on all strategic investment decisions. However, we have seen a lot of evidence that they increasingly call for strategic advice on how to excel on risk control as well as operational effectiveness. This points the way for a distinct German version of fiduciary management.”
Because the decision for fiduciary management will be taken behind closed doors at a senior manager or trustee board level, the advance of fiduciary management is expected to be more of a quiet revolution. While there have been a few widely publicised fiduciary management tenders, such as from insurer VPV, so far Pioneer’s clients have selectively shown interest in parts of the fiduciary model, mainly risk management and asset allocation services.
Corporates used to have most of their pension assets on their balance sheet but have increasingly adopted contractual trust arrangements (CTAs) to create external funding vehicles. These funded pension provisions are not restricted as to funding levels or investment and might adopt fiduciary management in full. However, Bilal believes that most corporate treasuries want to keep oversight of their funds themselves and appoint external specialists only selectively.
“Given the corporate treasury’s expertise and professionalism, companies would be unlikely to fully outsource, meaning the fiduciary manager would need to tailor his offering in a way to interface with the corporate treasurer at a high degree and carefully design the basket of services ranging from ALM over strategic and tactical asset allocation, overlay management to manager selection and controlling, fund administration and client reporting,” continues Bilal. “However, institutions with fewer financial resources - such as public sector pension schemes and pension funds regulated by insurance law - would have to explain to the regulator BaFin that they have a full grip on their entire investment management on an on-going basis.”
“But given the increasing challenges and complexity of investment management as a result of tightened regulation, difficult capital markets with volatility spikes and high-event risks paired with all-time low yields, there is increasing and selective need from clients across all segments,” he adds. “Public sector pension schemes, corporate pension funds, CTAs, as well as traditional Pensionskassen and Unterstützungskassen [support funds] may all benefit from a tailored German fiduciary version.”
The most attractive prospective clients to Pioneer are those that have the fewest resources that can benefit substantially from comprehensive investment solutions.
“We believe that mid-sized investors within insurance companies and pension funds will not be able to fully comply with everything that is required of them in terms of regulations,” says Bilal. “Most of them feel overwhelmed by the amount of decisions and actions that need to be taken to ensure the required degree of investment control and regulatory reporting. This provides us with a great value-adding opportunity.”
Pioneer has hired senior executives from the client side to look after the fiduciary client solutions, such as Stefan Tölg, formerly managing director of VHV Insurance Asset Management, CIO for Alte Leipziger life insurance and head of portfolio management at IBM Pensionskasse.
At present, Pioneer has around €12bn in assets under fiduciary management, the bulk of it for clients in Germany and Italy, which forms the company’s European roots. Smaller pockets of assets can be found in the Netherlands, the UK and Switzerland.
Pioneer says that it has no target figures for its fiduciary management business - instead, it will purely focus on offering high-quality advice.
“We want to keep our existing fiduciary management clients happy,” says Bilal. “This requires a lot of dedication and resources which limits our ability to acquire new clients. Instead of going after quantity, we would rather stay focused on our existing clients and look after one new client for the next 18 months.”
Bilal says fiduciary management is about developing a mutual understanding and seamless co-operation between the asset owner, managers and the many specialist providers. It is about ensuring that a consistent, coherent value chain is in place, and that due diligence is undertaken.
“For some investors, everything from the back office to the custodian is already fully functioning,” he says. “In such cases, we would come in at the manager selection or asset allocation design stage.”
The key to success in fiduciary management in German, according to Pioneer, lies in flexibility. This means teaming up with a partner for the operational aspects and for the entire fund administration, as Pioneer has done with SGSS.
But Bilal is keen to point out that this by no means represents standardisation of the fiduciary model. “Fiduciary management in Germany is about having an extremely high degree of flexibility,” he says. “We offer a full set, from strategic and tactical asset allocation advice to overlay and risk management but aim to be fully flexible on the extent of the services that we offer. We want to engage clients on everything that comes on top of their master KAG, such as the efficient and comprehensive running of their risk management. We feel we can add value by aggregating or raising economies of scale with regard to middle-office operations and through our purchasing power towards sub-delegated fund managers and service providers.”
Conflicts of interest arising from fiduciary management relationships are less of a concern.
“Whenever you can clearly state that your investment team and strategy is the best possible choice for a particular client, there is no reason for not putting your own investment product forward,” says Bilal. “However, key compliance checks need to be in place. In other words, the way in which the client is advised needs to be transparent. The investor also needs to take an active decision by himself, meaning that we, as an asset manager, would not directly sub-contract with third-party fund managers.Nevertheless, if an investor appoints us as a fiduciary manager but instructs us not to run underlying assets, we are flexible in doing that too.”