The vast German institutional investment market has been notoriously hard to access – for foreign asset managers, at least. But even so, many of them have been prepared to jump through hoops and stump up vast sums of capital to set up as all-German KAGs (Kapitalanlagengesellschaften), the specialised asset managers needed for investment funds.
Now, it is a different story. German lawmakers have finally levelled the playing field for German and non-German asset managers. The Investment Modernisation Act implements the EU investment directive (OGAW) and extends the so-called European Passport to different asset classes.
“It is not only a level playing field, but it probably plays to the advantage of foreign asset managers,” says Martin Theisinger of Schroder Investment Management in Frankfurt. “With the performance of traditional managers not having been so good, investment clients and sponsors will move to foreign firms – there’s a clear advantage.
“It definitely frees things up for asset managers who didn’t have a KAG under German law,” says Rainer Schröder, head of sales at Invesco in Frankfurt. “We at Invesco do operate a KAG, and so for us, the law doesn’t give us unmitigated freedom… but we can now do the business without using the KAG, so it gives us more flexibility.”
Operating a KAG in Germany involves an administrative process which is not exactly cheap, says Schröder. Though Invesco has no short-term plans to give up its KAG, there could be changes. “In the medium term we might not need to have it,” he says.
Theisinger says the firm was a KAG three years ago but then took the decision to sell it on, outsourcing this function. “It’s a very costly structure to have a KAG locally. If you don’t need it, why should you duplicate your assets?”
But there could still be some benefit for those who already have a KAG in Germany. Hans-Juergen Reinhart of RMC Risk Management Consulting in Frankfurt says those who already set up KAGs do have an advantage in the German market in that taking that step has shown them to have a strong commitment to the German market – something clients look for.
Robert Hau at Bank of Ireland Asset Management in Frankfurt says that in general the new law and the reforms it brings in will not affect BIAM’s business in Germany. But he welcomes it nonetheless.
“It is very laudable that the German Finance Minister liberalised the German fund industry with this law,” he says. “Now it is possible to get registered here in Germany hedge fund products (with strong controls) and it is easier to launch funds by German law. As well the minimum capital to build up a KAG is lower so it is easier for foreign asset managers to go this way if they like,” he says.
This is very likely to increase business in Germany for BIAM because of the new conditions, he says. “With the master KAG model and the outsourcing possibilities, foreign asset managers have been able for almost two years now to deal more easily with the German pension fund demands to run portfolios.”
Schröder says the Mmaster KAG practice has caused the big domestic asset managers to lose mandates, while investors have gained in flexibility.
“The trend started before the law,” he says. “The same practice now becomes more beneficial for the investor. Funds can be merged, with profits in one being set against losses in another.” This gives the investor significant tax benefits now. “There can be seven mandates in one master fund, which become one item in the profit and loss of the investor.”
Aside from the new law, Hau sees recent developments in the consultancy industry in Germany as good for foreign players too, because the market will be more open and the competition will be higher. “Consultants like Mercer, Watson and Wyatt and as well as PPC Metrics or Complementa from Switzerland will bring some global expertise,” he says.
Germany is an important market for BIAM, says Hau. This is because the market is still growing on the institutional side as well, and it is still occupied by German asset managers, banks and insurance companies.
“So there’s a big market share for foreigners. As well as this, the pensions regulations have been changed some years ago and there will be further amendments to optimise them which is good for our industry.” Starting next year, money invested in life at the insurance contracts will be taxed by end of the contract. This alone will drive more people towards occupational pension plans and fund products, says Hau.
The increased costs implied in the law, in terms of extra compliance and implementation of risk controls is not an issue for BIAM, he says. “Because we concentrate on traditional asset classes like global equities and bonds,” he says. Hedge funds are not BIAM’s business.
Theisinger sees no additional burden under the new law in terms of compliance. The demands are no more onerous than those in the UK or the US. And while investment in hedge funds is now permitted, the funds have been classified under the act as risky products, he says. Perhaps the losses suffered since the turn of the millennium will act as a brake on taking on funds with a warning label like this.
“Many of the insurance firms will need to have some profitable years before they start investing in hedge funds,” says Theisinger. The hype surrounding the new legislative permit for hedge fund investment does not mean anything is going to happen fast.
“If two to five per cent of assets flow into hedge funds, then everyone should be happy… it is a slow opening of the market,” he says.
Patrik Röder, managing director of Henderson Global Investors in Frankfurt, agrees that it will take time for investment patterns to change as a result of the legislation. “The real flow of money will be slow… the institutions are saying, we don’t have to be the first ones. The potential of the market is huge, but it will take some time.”
Some details about the precise implementation of the law are still unclear, pending government circulars which have yet to be issued. Röder finds some of the limits too tight. On the hedge fund side, he says the text reporting requirements may be a little too restrictive. “It seems that you still need some sort of Schuldscheine, or structured product, which makes it more expensive for clients,”
he says.
Beyond this, there is also a danger that the requirements will put some very good hedge fund managers off having any involvement with the German market. “The best ones might say, why should I do it just for Germany? So perhaps you won’t be able to access them.” The law may be tweaked to accommodate this, but certainly not within the next six months or so,” he says.
Some say the law doesn’t really change anything in practical terms. It simply puts into legal language the investment practices that have been going on for the last few years anyway.
“I really don’t think that the new Investment Act will change anything for home-based or non-German asset managers at all,” says Reinhart. “For a couple of years now we have been facing the trend of increasing importance of the non-German asset managers. The share of non-German asset managers in the institutional business is constantly growing especially with the ‘master-fund’ construction in Germany.”
There are, he says, three clear trends at work in the German market. First, clients are looking for performance – with active performance the most important factor; secondly, they want diversification, meaning more internationally orientated investments and an active choice of different investment styles. Thirdly, clients are less tolerant of bad performance than they used to be. “That means we have seen a lot more activity in changing managers in the last three years,” Reinhart says.
“All in all, the new investment act will underpin the ongoing trend for the non-German asset managers to increase their share in the German institutional business.”