Two issues were predominant in the German fund market at the end of 2007. One was the planned introduction of a definitive withholding tax on income from capital assets from January 2009 at a rate of 25%. This will ensure that funds of funds and multi asset funds will be seen as more attractive fund category in the retail business. Assets in these types of funds can be allocated between asset classes without a tax liability for the (private) investor.
On the same theme, a further aspect that will have a positive effect on the German fund industry, is that classic asset management mandates will be transferred into flexible fund solutions precisely with this state of affairs in mind. This will lead to a considerable one-off effect in 2008 on the number of new fund launches and on fund inflows.
The second issue is the amendment of the law governing investments, which will lead to a further clear liberalisation of permitted investments in Germany. So, for example, a further definition will be made concerning what constitutes a security. This means that funds will be able to invest in almost any asset that meets certain basic criteria. The amendment will create one of the most liberal legal frameworks for investments in Europe.
In the institutional fund business, equity capital-optimised fund solutions are gaining in importance in the light of the introduction of Solvency II. As insurance companies are the predominant investor group in Spezialfonds, (see figure 2, Spezialfonds by investor group), it can be assumed that such investment approaches will enjoy a very positive outlook. In Germany, as internationally, the trend is in any case towards more complex products with a controlled use of derivatives.
Overall fund market
In comparison with July 2007, the volume of equity mutual finds has decreased by some €7.4bn. Strong growth, however, was recorded in the volume of multi asset funds, to the tune of around €4.8bn. The trend towards exorbitantly high inflows in money market funds has halted and indeed reversed, and despite the performance effect in the middle of the year the result has been reduced volumes. The reasons for this are the effects of the sub-prime crisis and its well known effects on ABS paper and other short duration securitised paper. In general it remains the case that a significant proportion of mutual fund capital inflows is institutional assets.
Spezialfonds, with around half of the total volume of the German investment market, remain the vehicle for institutional investors. New Spezialfonds are generally created in the form of master funds with differing sub segments or segment funds. This means that overlay management and liability driven approaches can be applied more effectively. The number of Spezialfonds has decreased somewhat and the volume of assets remains unchanged against the level at the end of the first semester. As a result, the extent of the performance effect on volumes has meant that there have been outflows in the second half of 2007. In September alone €1.9bn was redeemed from Spezialfonds. Only within the credit institutions investor group were inflows attributable, to the tune of €950m.
Multi asset securities funds still predominate when it comes to the assets within Spezialfonds. However, this is only the asset category that has recorded a drop in volume in comparison to the end of the first half of the year. All other categories gained in volume. The number of multi asset securities funds has increased, however. The total number of funds has dropped or has remained the same in all other categories - namely money market, hedge fund of funds and single hedge funds.
It can be assumed that multi asset Spezialfonds will remain the predominant category as new funds and fund transfers mostly involved the aforementioned master fund constructions and therefore multi asset mandates. German institutional investors remain conservative, which means that allocations are mainly in the asset classes that one would expect and derivatives are primarily preferred for portfolio insurance, overlay management and risk management.
Clemens Schuerhoff and Hans-Jürgen Dannheisig are managing partners at Kommalpha Institutional Consulting, Hanover