Strategically Speaking: Deutsche Asset Management/DWS Group
Like its parent, Deutsche Asset Management (DeAM) set about trying to conquer the world in the 1990s and 2000s. CEOs have come and gone, as have brands. A stint as DB Advisors was followed by one as Deutsche Asset & Wealth Management before wealth management was split off in 2015. Another rebrand will follow this month’s planned initial public offering (IPO), under the guise of DWS, the domestic retail brand of its parent Deutsche Bank (DB).
DB’s recent woes underlie the reasoning for the IPO. On a call for credit analysts in early February, James von Moltke, Deutsche Bank’s CFO, said the bank was a long way from generating acceptable levels of sustained profitability and returns.
DB’s CEO, John Cryan, said on another call in November that there were “around 12” reasons for the IPO, including capital raising, providing the asset manager with independence and to provide a clearer “currency” of return. He added: “We do intend to keep proper control of it…. maybe in the fullness of time we could make some acquisitions within that unit.”
The reborn DWS now has the structure of a KGaA, a German form of master limited partnership, that will allow Deutsche Bank to exercise control over the entity even if its eventual stake falls below 75%. The established RREEF real estate and Xtrackers passive brands will be retained. RREEF was acquired in 2003 and Xtrackers was spun out of the bank.
At an investors and analysts meeting in December focused on asset management, Nicolas Moreau, head of Deutsche Asset Management, emphasised the benefits of the structure, which he said will also allow it to “unravel growth”, giving visibility to the entity, creating “a more operationally agile company”, and, in its shares, creating a “new currency” with which to align remuneration with performance.
Moreau, who joined DeAM in 2016 from AXA Investment Managers, also outlined four components to future growth in the asset management sector: increasing involvement of asset managers in lending; exchange-traded funds (ETFs) as building blocks for outcome-led solutions; big data and artificial intelligence as part of the investment process; and ESG becoming mainstream.
With this in mind, Roelfien Kuijpers – a DeAM and Deutsche veteran who joined the bank in 1995 and asset management in the early 2000s – was appointed head of responsible investment in September last year.
Kuijpers, speaking with IPE late last year, says ESG has been integrated into the investment process by customising BlackRock’s Aladdin platform. The ESG ‘engine’ uses data from seven external providers to score companies and portfolios on a sustainability basis and is run by a data group within the CIO office for responsible investments, which is headed by Petra Pflaum as CIO for responsible investment.
She also points to another of Moreau’s drivers of the asset management business – big data. “I think one of the reasons ESG investing is really creating a lot of momentum now is because what gets measured, gets managed,” Kuijpers says. “There is so much more data available today so if you can create algorithms that can really sift through that data in an intelligent way, you can measure things that you could never measure before.”
Recent work to quantify the effect of climate change on investment portfolios has been driven by a large insurance client – DeAM is the second largest global manager of insurance general account assets. Kuijpers says that all large European insurance companies, as signatories to the Principles for Sustainable Insurance, have started to adopt ESG factors into their general account investments.
Having seen the growing impact of physical climate risk on its underwriting portfolio, the insurance client also wanted to measure the effect on its investment portfolio.
The catalyst was the Thai floods of 2011, Kuijpers explains. “It turned out that the world’s leading semiconductor companies all had factories in the same area in Thailand. So 40% of the worldwide capacity was knocked out of the semiconductor industry and that, of course, had further repercussions on other supply chains.” Such insights are included in a November 2017 white paper written by Four Twenty Seven, a California-based climate risk research specialist.
Four Twenty Seven has mapped the locations of more than a million corporate facilities worldwide and models the risk that they could be affected by climate events and DeAM will now incorporate a physical climate risk score within its equity process. Taking into account Moreau’s point about the role of ETFs in asset management, DeAM could also apply these metrics to a suite of climate risk-focused ETFs, or apply them in other ways to institutional portfolios, such as in an overlay in the way that Sweden’s AP4 or New York State Common Retirement Fund have done.
“We are currently working on a suite of passive ETFs that will incorporate more ESG criteria in various ways, including smart beta,” confirms Kuijpers, who adds that DeAM last year won “significant passive equity mandates where ESG was fully embedded into the investment process”.
She adds: “Now that asset owners are truly focused on this, they are starting to come with more questions. So you can do bespoke solutions, but you can also create more fund and ETF solutions that are available for the retail market, for example.”
Aside from her new area of specialisation, how does Kuijpers assess the prospects for her firm? Here, she points to its values, noting that high levels of integrity and good performance are a given.
“Integrity and performance, they come with an asset manager. If you are fiduciary, you’d better have very high integrity, and you ultimately are in business because you create investment performance for your clients.
“I would say we are a very sustainable organisation, because in spite of changes at the top, in spite of some of the history, we truly have built a very long-term, sustainable business with great capabilities, a massive amount of stability and a really great organisation. And I will also say that entrepreneurism is deeply ingrained in the organisation as well.”
When the IPO gets the go ahead this month, investors will have the ultimate say as to how to value the reborn DWS Group, and in what ‘currency’.