Investor faith in Spezialfonds continues after the highest year of inflows since 1998,
writes Till Entzian


The highest net inflows of funds since 1998 ensured that 2010 would be a successful year for the Spezialfonds. Spezialfonds were able to register a total inflow amounting to €70.9bn, more than twice as much as in 2009 (€31.0bn). This pleasing result is rendered only slightly less satisfactory by the fact that total growth (€84.4bn) was a little lower than the €89.0bn of the previous year. Since total dividend payouts went up only a little - from €20.2bn to €22.0bn - the lower figure for the total volume increase can be explained by the fact that the capital markets did not develop so favourably in 2010 as in 2009. However, the point that should be emphasised above all is that investors' faith in Spezialfonds as an instrument has continued to remain stable, and we can also expect higher inflows of funds in future. In the first half of 2011, we have already seen inflows of funds amounting to €16.9bn. This suggests that, although 2011 may not be as successful as 2010, it will certainly attain the very respectable level of 2009.

Spezialfonds are once again managing a higher volume than mutual funds, as they have done since the crisis year of 2008. Thanks to the Spezialfonds' position as more conservative and less subject to share price volatility, they experienced lower falls in value during the financial crisis than many stock-based public funds. In the first half of 2011, the improvement progressed further. At the end of June, Spezialfonds were managing €833bn, as opposed to €695bn in mutual funds. The third mainstay of the investment sector - so-called free portfolio management - fell back slightly in 2010. Assets managed outside investment funds were reduced from €326bn to €307bn.

According to figures provided by the BVI, the trend towards the segmentation of Spezialfonds is continuing to make progress, which explains the way the hands have been dealt to the companies competing in the master KAG business. The volume growth in Spezialfonds observed in 2010 almost exclusively benefited segmented Spezialfonds, which grew by precisely €70bn to €479bn. By contrast, non-segmented Spezialfonds increased only by €13bn, so that they now manage over €306bn. The structure of the segments means that different investment areas are under the responsibility of different asset managers, and yet the whole portfolio is held in a single Spezialfonds. For segmented Spezialfonds, the master fund concept remains established. However, this should not be confused with the master fund forming part of a master feeder concept. In the latter, the feeder fund invests more or less all its assets in sections of one and the same target fund, ie, the so-called master fund. This concept was permitted on 1 July 2011 by the UCITS IV implementation law, and, among other things, is intended to make cross-border transactions easier.

Asset allocation trends show that Spezialfonds again invest more assets in safer investments and the value of fixed income investments has increased from €375bn to €402bn. Continuing a trend that has been in place for over ten years, domestic bonds fell further by comparison with foreign securities. Thus, at the end of 2010, domestic bonds were valued at €97bn, as against €305bn for foreign bonds.

Equity investments, which in 2008 collapsed from 32% to 17%, have not risen again since. According to majority opinion, this is set to continue, because a higher equity allocation on the part of institutional investors - in particular insurance companies - should yield higher profits for the end customers in question in the long term, even if there were greater global losses in the meantime.

However, against their long-term interests, most institutional investors see themselves obliged to avoid short-term losses through corresponding low-risk and low-return orientation of their investment portfolios; so they always have their eyes fixed on the next balance sheet date, which will ensure them specific minimum interest and certainly only very small losses. For this purpose, Spezialfonds companies offer capital protection concepts that deliver a specific minimum rate of return at the end of the year, within the limits of the above-mentioned risk-bearing capacity. The low equity allocation revealed can be largely traced back to these capital retention concepts.

It is also worth pointing out that there was a further increase in the share of target funds, which amounted to 9.5% of the total volume by the end of the year. By May 2011, target funds' status had even risen by a whole percentage point, and the volume was €61.5bn. A considerable part of this target fund must have involved exchange traded funds, with which a great many markets can be replicated at a relatively low-cost and in a flexible manner.

As shown by the Bundesbank's research, most target funds are domestic Spezialfonds (€71bn, or 61% of all target funds held in domestic Spezialfonds). Practically all other target funds are domiciled in Luxembourg (27%) or Ireland (8%). Target funds from other countries total merely 4.4%.

However, the aim of the Bundesbank's research, which extended over the months of March, April and May, 2011, was to establish the geographical distribution of investment in securities for domestic investment funds.

The results show that in May 2011, 30% of the total volume was invested in domestic securities. Some 14.4% of securities holdings were in the PIIGS countries (€106bn). If we consider only government bonds, the proportion is even higher, namely 19.5% of securities from these countries (€35bn, out of a total of €181bn euros of public loans). According to the Bundesbank's figures, in the course of the two months under consideration, Spezialfonds had already parted company with some of the investments referred to. To pick out just one country, Greek public bonds reduced in value from over €2.9bn to €2.0bn. Perhaps we should currently also highlight the rather high amount (€22.4bn) that is invested in Italian public bonds.

As regards the sources of funds, trends already observed in previous years continued in 2010. In particular, the use of Spezialfonds for banks' equity investments decreased again. Of the €151bn listed in 2006, only €121bn remained by the end of 2010. In contrast, insurance investments continued to increase, and by the end of 2010 they accounted for Spezialfonds amounting to €256bn. Pension funds, which were not assessed in their own right until 2004, accounted for an additional €123bn. "Other companies" displayed considerable growth, with investments going up from €159bn to €200bn. There were no changes of any significance to any other investor groups. The most important investor groups in relation to the specialised security funds thus remain unchanged and the Spezialfonds is one of the most important investment instruments for insurance funds. According to the BaFin statistics for the first quarter of 2011, primary insurers invested an average of 25% of their total assets in domestic special funds. To this we should add 1.1% in foreign investment assets. The total amount represented by insurance investment is €307bn but this does not take account of investments of re-insurers, which should also be added. The discrepancy against the €256bn in the Spezialfonds can be explained in part by real estate Spezialfonds, but mostly by mutual fund holdings. These are invested, for example, as part of unit-linked life assurance, but also as own investments.

The Luxembourg specialised investment fund (SIF) represents the growth of a competitor which, judging from the figures so far, does not present any excessive danger for the domestic Spezialfonds. As figure 8 shows, the asset volume of SIFs rose to €25bn by March, 2011. The capital inflow for the SIF in the last calendar year amounted to €6bn, (only) a tenth of that in the case of domestic Spezialfonds. The Luxembourg instrument may still be more flexible and mobile than the domestic Spezialfonds as regards a few individual aspects but this does not usually represent any advantage for insurance funds, due to their own investment regulatory restrictions and the transparency regulations. At any event, the number of suppliers of German origin stagnated in 2010 for ten investment companies and the number of SIF's increased from 93 to just 96.

There is nothing to report concerning new competitors in the Spezialfonds market. While four new companies have been established over the last twelve months in the specialised real estate fund sector, the number of specialised security fund suppliers went down again. We have already reported on cominvest, which has been merged with AGI as planned. Deka has carried out another merger within the group, and in mid-2010 it merged the master asset management specialists Deka FundMaster with Deka Investment.

The reason given was that this would enable synergies to be brought about. This could have been understood merely on the basis of the obligations laid down in the internal documentation (key words: organisation manual, processes, compliance, risk management, etc). There was a similar motivation behind the move by Credit Suisse to sell its securities services business CSAM to SGSS last year and thereby to hand over the entire administration of special assets to a specialised provider. The merger of the two companies was carried out at the beginning of 2011. Credit Suisse is still responsible for the asset management of the segregated assets in question.

There was more movement in the listed investment company sector. During the most recent calendar year, two new companies were established of this type - Varengold Investment Aktiengesellschaft mit TGV and Luxembourg Financial Group InvAG mit TGV, both with head offices in Frankfurt. In addition, Humboldt Multi Invest InvAG mit TGV, Frankfurt, went out of business at the beginning of 2010. Unfortunately, we have no statistics relating to the assets managed by listed investment companies. This is all the more regrettable as obvious advantages can be observed for this investment instrument as against the Spezialfonds, and as early as 2008 a domestic pension fund converted a whole series of Spezialfonds, with a volume amounting to €10bn, into holdings in listed investment companies.

Figure 8 shows the 28 companies that are responsible for more than €6bn worth of assets. The figures can be read off for each company showing which volume is administered only (left-hand side of column: portfolio management by third parties), which volume the company is ‘completely' responsible for (centre: administration and portfolio management) and what volume is managed only (right-hand side: asset management for third parties). This takes in, not only the Spezialfonds business, but also securities portfolios and other portfolios apart from the Spezialfonds.

Since the official approval of outsourcing by the investment modernisation law of 2004, the importance of so-called "free asset administration" has greatly increased, as is clear from figure 1. If the Spezialfonds volume at the end of 2004 (€543bn) was almost four and a half times as big as the free asset administration volume (€123bn), this factor has since fallen to only 2.2 times: in 2009, Spezialfonds contained €729bn, against €326bn outside investment funds. However, since then this trend seems to have turned around in a remarkable manner. In the middle of 2011, the volume of Spezialfonds (€833bn) was three times as great as the free asset administration figure (€276bn).

And yet it must be stated that institutional free asset administration is firmly established as an important business area in the investment sector. Many competitors see their core competence not in administration but in asset management. Whether they offer this service to their customers inside or outside the context of a Spezialfonds depends exclusively on the requirements and needs in the individual case. The advantage of a Spezialfonds is the clear and well-tested supervisory, regulatory and organisational framework, while free asset administration makes it possible to apply asset management expertise in a flexible manner to every conceivable kind of portfolio.

It can easily be recognised from figure 4 that there is a very high degree of competition in the sector. The AGI is undoubtedly at the top of the list, with total administered assets of €257bn. Only a mere 10% of these are managed by third parties in portfolios; to this must be added €18bn of assets administered in other ways, for which the AGI has taken over the portfolio management. On the basis of total administered assets amounting to €1.06trn, AGI alone has a market share of 25%. If we add DWS, Universal, Generali and Inka (HSBC) to this, the five biggest companies have a market share of 60%. And we need only look at the twelve biggest companies to account for 90% of the market. The remaining 10% is divided among the other 26 suppliers of specialised security funds and/or institutional asset management companies.

Outlook
The further development of the specialised fund will be very dependent on the implementation of the AIFM directive. This text, over 70 pages long, was published in its definitive form on 1 July 2011, and has the declared objective of protecting the financial markets against a new crisis by regulating the asset managers of alternative investment vehicles (ie, those not conforming to UCITS).

In reality, however, it is the open real estate funds (among others) and, above all, the Spezialfonds that are affected, and a lot of additional and mainly pointless obligations are imposed on the capital investment companies. Insofar as the legislators succeed in keeping expenditure low for companies through solutions that are as practical as possible, there is nothing to prevent further growth. The German investment sector did not cause the financial crisis.