Nina Röhrbein reviews a recent study on Spezialfonds demand from the investor's perspective

Institutional investors overall benefited from low interest rates, the resulting positive market trends and positive equity performance in 2010. However, most remained cautious on equities, particularly as risk budgets were low following the crisis. Uncertainty, particularly with regard to interest rates, limited investor mobility over the year.

The majority of new Spezialfonds mandates issued in 2010 were for balanced funds and bonds, but overall new Spezialfonds mandates declined across all asset classes.
One-third of institutional investors said they wanted to issue new mandates within the next 12 months. However, among pension funds, this number was even lower, with four-fifths not planning to issue new mandates, down from 39% in 2010.

Over half of institutional investors issuing new mandates preferred absolute return mandates to relative, benchmarked-based ones, while 21% remained undecided. In the 2010 study, 60% had opted for absolute return mandates. The preference for absolute return mandates waned among all institutional investors, banks, asset managers, insurers and pension funds, but most prominently among the latter where the preference halved from 100% in the previous study to now 50%.

Kommalpha attributes this to the lack of clarity in absolute return products, which range from bonds and equities to derivative strategies and momentum-driven approaches, as well as the failure to deliver the expected performance.

Just over 20% of investors were unsure as to whether to invest passively or actively in equities, government and corporate bonds in the future, down from 40% in the previous study. More importantly, the trend towards passive management seems to have ground to a halt with a clear trend towards active management although some institutional investors balance their mandates through overlays.

Government bonds proved to be the most popular choice for passive management, with 28% of investors stating they would prefer purely passive or mainly passive mandates in that asset class.

The enthusiasm of foreign asset managers to enter the German Spezialfonds market is unbridled, according to Kommalpha, particularly with opportunities emerging in the mutual funds (Publikumsfonds) arena. The market currently holds more than €800bn in assets under management. However, competition has become significantly tougher and a couple of local houses have also come into the picture.

Medium-sized Swiss houses but increasingly also French and UK asset managers are the most active and successful external managers in the German Spezialfonds market. The preference for domestic asset managers has fallen from 44% in 2008 to 36%, while 18% would opt for a foreign manager and 45.5% are undecided. Among pension funds, 60% would hire a domestic asset manager and 40% were undecided. Only every fourth investors currently works together with an international asset manager. The same number applies to investors working consultants in the asset management area.

The study also found that investors are much more at ease with changing asset managers than five or eight years ago. This, according to Kommalpha, is mainly due the master KAG structure, which is used as an all-round administrative solution now by almost every institutional investor and has simplified the process. Performance pressure is also partly responsible for the increase in manager changes. Among existing mandates, on average 34% of investors - and one fifth of pension funds, 47% less than in the previous study - said they were planning to change managers within the next 12 months, a drop of 7% compared to 2010, which Kommalpha attributes to the uncertainty in the markets.

The criteria most important in manager selection, according to the report is risk management, chosen by 68% of investors as the most crucial factor, ahead of product quality and performance, which were classed as very important by 63 % and 50% respectively.

In 2010, risk management was classed by 62% as very important, already up from 58% in 2008. Performance was more important for investors in 2011 than it was in 2010, where 84% viewed it as important or very important. With 88%, the quality of products is more important in 2011 than it was in 2010 with 80%. However, it remains below the 96% level of 2008.

Overall, the criteria most investors were satisfied or very satisfied with was performance with 72%, up from 46% in 2010 and 63% in 2008, but still lagging behind the 2007 level of 77%. Just 2.8% of investors reported complete dissatisfaction with their managers' performance. The same number was also dissatisfied with the fees.

Satisfaction levels also improved in risk management. The highest mark ‘very satisfied' more than doubled from 12% in 2010 to 25% in 2011, while 11% more than in 2010 indicated they were satisfied. However, at 69% overall satisfaction still is below the 79% that were satisfied with their managers' risk management in 2007.

Reporting has benefited from standardisation, which is why more investors than ever before, 67%, were happy with the reporting of their asset managers.

In 2011, more investors were satisfied with the customer service, product offering, product quality, investment process, fees, reputation, organisation, and complaints management of their managers in comparison with 2010. The only criterion with which investors were less happy was international orientation.

Last year's trend back to more traditional asset classes remains unbroken. In total, 83% of investors classed traditional asset classes as important or very important, compared to 65% in 2010. Alternatives were not held in such high regard. Hedge funds, for example, were very important to 11.6% but were of no importance for over 23% of institutional investors. They were the most unpopular asset class, with 58% deeming them not important. Structured products did not fare much better, with over 54.5% calling them not important. But half of investors regarded investments in mutual funds, which increasingly come in the form of institutional share classes, as important, up from 32% last year.

More importance - almost 30% higher than in 2010 - has been ascribed to the qualitative ratings of funds in investors' pursuit of more transparency. Increased co-operation with consultants was unimportant to 38% of investors.

Kommalpha's study ‘Der Spezialfondsmarkt 2011 - Aktuelle Entwicklungen auf dem deutschen Spezialfondsmarkt aus der Sicht von institutionellen Investoren' is available at