German Asset Management: Stepping out in new shoes
Nina Roehrbein asked Michael Fuss about the latest reorganisation of Deutsche Bank’s asset management activities
Few situations justify the term ‘all change’ as much as the ongoing activity at Deutsche Asset & Wealth Management (DeAWM).
The Deutsche Bank group rebranded all its asset management operations this year – including DWS, with the exception of its mutual fund business in Germany, db X-trackers and DB Advisors – after the bank decided against selling part of its asset management business.
DeAWM’s restructuring projects are making steady progress. Institutional clients will in future be supervised from one platform and work is under way to integrate accounting for funds and mandates into the platform, which is expected to be finalised before year-end. This means all future operations will be handled from DeAWM’s Frankfurt-based investment management company.
The investment platform (KAG) of Sal Oppenheim in Cologne, meanwhile, as well as a smaller insurance-focused entity, will close by the end of the year as part of the integration efforts.
This, according to Michael Fuss, co-head of asset management Germany at DeAWM, will facilitate the implementation of the increasingly complex German investment law.
“By reducing the number of legal entities to one, we can conform with the Kapitalanlagegesetzbuch (KAGB) and the European Alternative Investment Fund Managers Directive (AIFMD) more cost efficiently,” he says.
Consolidation has also taken place in DeAWM’s product offering and relationship management. The active management business, the passive space with X-trackers, exchange-traded funds (ETF) and index funds, as well as the solutions business, which pools investment advice for occupational pensions and includes asset-liability management, will all be positioned globally.
Fuss hopes that this will increase awareness of the new brand.
While he is happy with the active side of the business, he says the group wants to gain more traction in passive management, which currently amounts to €16bn in assets under management – a niche, as he calls it.
Together with Steffen Leipold, Fuss leads the global client group in Germany, responsible for distribution to insurance comapnies, corporates, Pensionskassen, Versorgungswerken and non-profit organisations.
“In this area, the teams have been stable throughout the strategic review, which has helped the continuity in client service,” says Fuss. “We still need to analyse the needs of investors with the relationship manager first and assess their risk budget and return targets in order to identify the right investment products for them. But rather than having several product specialists talk to one investor, we have now consolidated and co-ordinated our efforts on the relationship management side.”
Fuss believes that DeAWM’s good position in the German institutional and retail markets will remain unchanged. But he admits that is still potential for new business in the German market with the new structure there.
“It continues to amaze me how smaller competitors are able to survive among this onslaught of increasing regulation and pressure on margins,” he says. “But a certain amount of consolidation has already taken place.” Deutsche Bank itself acquired the private bank Sal Oppenheim in 2010, although there are currently no plans for further acquisitions.
DeAWM’s investment strategy has also been revised as part of the restructuring process.
“But it has been an evolution of previously existing processes – not a full-blown revolution,” says Fuss. “However, We have implemented a stronger interlocking interconnection with the macro view of the CIO, in other words a safeguard to ensure that our portfolios only contain securities that fully match our philosophy.”
The vast majority – 70-75% – of DeAWM’s institutional business has, to date, been in bonds. Investment grade corporate bonds used to be the asset manager’s flagship product alongside European small and mid-cap and global equities from DWS.
“We have yet to expand in our multi-asset department,” says Fuss. “This may have a good track record on the institutional side but we can still strengthen our position across the whole of the group.”
The demand from institutional investors for higher returns in the current low interest rate environment has led to a run on alternative investments. As a result, alternative investments have also become one of the large set of offerings of DeAWM. This includes real estate.
“Despite the increase in property prices, most real estate allocations in institutional portfolios in Germany – which are typically in single digits – have room to expand,” says Fuss. “Infrastructure is another sought-after asset class, although investors and asset managers are still trying to identify the right vehicles which allow tax-deductible investments according to the insurance supervisory law VAG. But the asset class is set to grow strongly.”
According to Fuss, German investors have also started to look at absolute-return strategies but hedge funds still have a poor reputation.
As part of the restructuring process, sustainability has also moved up a level at DeAWM.
Michael Schneider, the new head of ESG, is responsible for ensuring that these issues will be integrated in portfolio management and the investment process throughout the organisation and beyond the Frankfurt platform.
Renewables will remain a niche in the alternatives space and for DeAWM as a traditional provider, however.
Fuss also sees opportunities in high yield and emerging market debt in the fixed income portfolio. “But blind trust in emerging market debt is a thing of the past because investors have realised that different countries can develop very differently, although the macro trend and the alignment of ratings between developed and emerging markets will continue to exist.”
Another asset class of interest to institutional investors is loans. Here, DeAWM has set up a vehicle that allows allocations with smaller, €5-10m tickets. “We have offered loans for the last six years but only ever as segregated mandates and only for a minimum investment of €50m, which were, consequently, only ever available to the large institutions,” says Fuss.
Nevertheless, DeAWM’s flagship products will remain in the fixed-income space, according to Fuss, particularly in the euro aggregate space.
With regard to environmental, social and governance (ESG), Fuss says the market is split between those who do it – churches and Versorgungswerke – and those that have no time for it. DeAWM has offered sustainable products for seven years.
“We have some sustainability products – in equity as well as corporate bonds and emerging market debt – and, in our experience, sustainability criteria have no negative impact on performance,” says Fuss. “In fact, we have always been able to beat the respective benchmarks even with a restricted universe.”
Risk management is an important topic to DeAWM and its institutional clients. While risk management is integrated in every step of the investment process, the asset manager also offers dedicated risk-hedging solutions for market-risk hedging as well as tail-risk hedging. A quantitative risk management model, based on the risk budget, automatically begins to hedge when volatility increases. According to Fuss, this has worked very well in the past few years independent of any macro calls or strategic asset allocation.
Now DeAWM’s aim is to bundle the resources within the platform, which will create some more potential on the risk overlay side.
Fuss is hoping for a period of stability in the firm’s organisational structure after the flurry of changes over the last few months. “It can only be positive for us to appear in the market with one strategy and keep it for the coming years,” he says.