n general there is an increase in the investment of institutional assets using mutual funds. The arguments in favour of this trend are the adoption of IFRS accounting standards by corporates, mutual funds’ higher liquidity and fungibility, and the corresponding supply of share classes orientated towards the pricing requirements of institutions.
Many German institutions implement the satellite element of their core-satellite strategy with mutual funds. In the core element they are increasingly using passive ETFs and diversify in their satellite component through active asset allocation into asset classes, investment approaches or regions. The structure of master Spezialfonds also delivers an efficient platform for investment in mutual funds. The risk aversion of German institutions also means that the use of special mutual funds with absolute return or capital protection approaches is growing.
These are to a large extent managed and administered on a near-shore basis in Luxembourg, as well as in Ireland. This means that Germany is not increasing in significance as an investment location, and this state of affairs will not be significantly altered by the forthcoming amendment of the law governing investments. Recent years have shown an increasing professionalisation of the German institutional investment fund market, and the high potential in the German pension market will deliver further strong growth.
The total German fund market
(figures 1 and 2)
The total German fund market has a volume of around €1.4trn, of which around €700m are invested in Spezialfonds, and €740m in mutual funds. The size of the institutional market cannot be defined precisely although it can be estimated from industry reports. Influential market observers believe that up to 30% of mutual fund assets belong to institutions and the proportion is considerably higher in the case of new business. In total around €900m of institutional assets are invested in funds of all types.
The German variant: Spezialfonds (figures 3&4)
Spezialfonds, the typically German vehicle, have traditionally dominated the institutional fund business, and more than 4,000 Spezialfonds are held by the various groups of institutional investors. The most important investor group in terms of asset volume is insurance companies, and credit institutions in terms of the number of fund holdings. Pension institutions are much less importance, although it should be noted that not all providers differentiate between insurance and pension entities in their reports to the Bundesbank. However, capital funded retirement provision in general needs to catch up with the rest of Europe. The German state pension and sickness insurance systems rest on a pay-as-you-basis and without capital funding, and the €21bn in assets that they do have are primarlily base reserves and equalisation funds.
German Spezialfonds are negligable as an export story and the volume of foreign assets can be disregarded.
Asset class trends (figures 5 and 6)
Balanced portfolios dominate within Spezialfonds, and the general trend towards specialisation is not followed in all cases. The rapid adoption of so-called master funds (or master KAGs) has played a stabilising role in the form that balanced assets take. In the case of master Spezialfonds, the different asset classes, investment styles and regional allocations are replicated in sub portfolios and administered in a single legal framework.
German institutional investment is traditionally dominated by fixed income investment. This is reflected in the fact that around €170bn is administered in pure bond Spezialfonds, and that a considerable proportion of balanced Spezialfonds assets is invested in fixed income. Hedge funds and fund of funds have not played a significant role since they were first permitted at the beginning of 2004. Money market Spezialfonds play a limited role within Spezialfonds, although institutional investment dominates the rapidly increasing fund flows into money market mutual funds, where their share accounts for more than 60%.
Dannheisig and Clemens Schuerhoff are managing
partners at Kommalpha Institutional Consulting