Limits to advice
The question as to what extent advisory services should be used by Spezialfonds seeking international investment expertise for specialist sub portfolios within the Kag structure, often from US, UK or Japan domiciled asset managers, is arousing heated debate in Germany.
And as the 1999 Kandlbinder Report notes (see supplement), just how far this practice has spread through the industry is unclear.
Germany’s federal banking supervisory office, the BAKred stipulates through the KAGG law that Kags, the investment management company legally required in Germany to manage tax advantaged Spezialfonds, may be advised by a third party for Spezialfond investment, but that any final decision must be taken by qualified individuals within the Kag itself. However, one fund manager sums up the grey area that has mushroomed around the issue of advisory services to Kags.
“The BAKred is looking to protect investors, but much of what is being discussed at present concerns ‘outsourcing’ and this is not specifically defined in German investment law.
“There may be a number of managers advising a fund and the question appears to boil down to the definition of when you are advising and when you start to manage your part of a ‘super’ fund - some of which could be 90% advised from outside the Kag.”
Another adds: “The regulator takes the view that if a Kag is advising another Kag or a third party is involved, then there is a question mark over the final responsibility for the investment decisions in the event of anything going wrong.
“It is certainly an issue that they are considering at the moment.”
Another issue being discussed is direct investment advising between Kags, often carried out via a custodian in order to circumvent German law.
One foreign investment manager in the German market believes that the advisory service adequately serves German investors: “ We feel what we do is not against increasing the wealth of our clients in a perfectly normal fashion.”
The Kandlbinder Report also points out that foreign managers with no legal investment trust company (ITC) in Germany are actively pressing for this advisory basis to be clarified in the German investment market, using Austrian law, where full responsibility falls to the ITC for any third party advisory services, as their example.
Kandlbinder also notes that ITC’s established in the last two years are already ostensibly operating as such.
The quest for cost reduction within the costly Kag set-up is also prompting investment managers to see what can be outsourced within the context of the ‘management’ of Spezialfonds.
As one manager says: “ The issue is what a Kag might be allowed to do by law in terms of the outsourcing of back office administration and accounting.
“I believe there are Kags which are already using third parties for the back office part of the Kag and I think it is very much the case that with German law being open to interpretation, investment managers are seeing how far they can go before the regulator steps in.
“If the BAKred doesn’t get involved then these methods become more or less become accepted.”