Volumes invested in domestically registered Spezialfonds rose again in 2007, even though the consolidation that has resulted in a decline in the number of funds continued - albeit at a slower pace. Managers’ involvement in the Spezialfonds business is changing too, as administration and portfolio management responsibilities have become increasingly separate. KAGs facing international competition have the challenge of developing further innovative fund products and providing more flexible management. Till Entzian presents his annual survey of the market

Domestically registered securities Spezialfonds saw volumes rise a full 3% in 2007. They managed some €670bn at the end of the year, according to the BVI, the German asset management industry association. This means securities Spezialfonds saw slower growth than in the past - growth levels of 8.7% and 13.6% were achieved over the two previous years.

In the Spezialfonds field, invest-ment and asset management companies were responsible for management decisions concerning a total volume of €489bn, in the mutual funds field they were responsible for €724bn, and some €331bn was managed outside of investment funds. Furthermore, some 30% of the assets held in Spezialfonds were managed externally or with the aid of external advisers. Some 19% of the non-investment fund volumes was outsourced.

Despite rising volumes and inflows into Spezialfonds, the consolidation which has seen a decline in the number of domestically-registered Spezialfonds since 2002 continued. The pace of the consolidation has slowed, however. In 2007, the number of Spezialfonds fell by a further 157, reaching 4,183 at year end. This represents a slowing rate of decline. Since 2003, an average of 300 special funds has disappeared each year due to merger or suspension. The consolidation is the result of mandates that were previously spread between several companies being combined. The process has been in train since 2001. Then, there were more than 5,500 Spezialfonds. At the end of 2007, the average size of a securities special fund stood at €160m, slightly larger than the average securities mutual fund, which had €149m.

The picture on the institutional side, which was relatively clear until a few years ago, has become confused as the value creation chain has broken down. Several capital investment companies (KAGs) have become specialised master KAG businesses. They mainly offer administrative services, including establishing investment funds, meeting regulatory requirements and reporting. Part of this concept involves outsourcing portfolio management to third parties, shifting responsibility for investment decisions to external advisers or managers, whose identity often varies depending on the sector. Until now, the statistics have listed all assets managed in this fashion as belonging to master KAGs. As administration and management responsibility in the Spezialfonds business have become increasingly separate, this approach is no longer accurate.

The BVI’s data shows that it is possible to distinguish between volumes that are ‘only’ administered and those that are managed. Table 1 shows the volume of assets under the control of each KAG or asset management company, including all assets held by securities Spezialfonds and assets managed outside investment funds. They are divided up by KAG or KAG group. 

 

The first column shows the asset volumes for which securities Spezialfonds carry out administration but not portfolio management. The second lists the asset volumes for which a single business carries out both administration and portfolio management according to the traditional model. The third column shows volumes for which the KAG only carries out portfolio management, handing administration to another KAG. The three remaining columns show assets managed or administered outside investment funds on the same basis.

 

The largest player in securities Spezialfonds and in non-investment-fund assets is Allianz Global Investors Deutschland Group (ALI), and by a large margin. It has a total of €226bn in assets under control. Most of this - €118bn - is in securities Spezialfonds. Of this, AGI both manages and administers some €90bn of the €109bn in securities special funds lodged with it. It is responsible only for administration in the case of a further €19bn. It also manages some €9bn in securities special funds for other asset managers. AGI is responsible for both administration and portfolio management for €180bn in non-investment-fund assets. It also leads in terms of the ‘classic model’ of taking responsibility for both administration and portfolio management in the field of securities Spezialfonds: it runs €90bn this way.

Union Investment Group comes second, with €43bn, followed by Deka-Group, with €40bn. Both companies have the advantage of being able to distribute their products to a large number of credit institutions and other institutional investors.

Further down the list come MEAG Munich Ergo Kapitalanlagegesellschaft with €38bn and DWS/DB-Group, which has marketed itself in the institutional market as DB Advisors since March. It has €35bn. Under the new brand DB Advisors, Deutsche Bank has bundled its institutional asset management offerings together with its institutional hedge fund business, which previously was marketed as DB Absolute Return Strategies.

 

Universal-Investment-Gesellschaft has the largest securities Spezialfonds volumes that are “only administered”. It has €64bn under administration. Since its founding, this company has concentrated on the administrative side of the investment business and has thereby attained a leading position in the master KAG business. In second place comes HSBC Trinkaus & Burkhardt Group with €34bn. Societe Generale Group comes third with €23bn. Next on the list come Allianz Global Investors Deustchland Gruppe and Helaba Invest Kapitalanlagegesellschaft with €19bn and Metzler Group with €18bn.

With €10.4bn, DB Advisors has the largest volume of securities Spezialfonds from outside the company. Allianz Global Investors Deutschland Gruppe takes the number two slot with €9.2bn. Further down comes cominvest Group with €6.2bn, BayernInvest Group with €6.1bn, then Oppenheim Group with €3.7bn and Lazard Asset Management (Deutschland) with €4.4bn.

In the non-investment-fund managed assets arena Allianz Global Investors Deutschland Group takes the top slot with a volume of €108bn. For Generali Investment Group, which comes second with €70bn, this is clearly the company’s core business, since otherwise the company only manages securities Spezialfonds to the tune of €3.5bn. DWS/DB-Group comes third with a volume of €51bn, with €29bn of the administration outsourced to DB Advisors. AXA-IM Group comes fourth with €26bn, followed by W&W Asset Management Group with €18bn.

 

Investment law amendment

The changes to the rules on Spezialfonds are more heavily influenced by deregulation than any other area of the Investment Law. Before, special funds were treated in a broadly similar fashion to mutual funds. This is no longer the case. The main reason for these profound changes to the legal framework for Spezialfonds is that Luxembourg introduced a new law on special funds at the beginning of 2007, giving Luxembourg-registered special funds much broader investment freedom.

In Germany, the upper limit of 30 individual investors in a Spezialfonds was lifted, meaning Spezialfonds can now have as many investors as they want. However, either the contractual conditions or the tripartite agreement should specify an upper limit of 100 investors in cases where rules from the Investment Taxation Law relating to investment funds are to be employed.

 

Option to remove fund categories

The core of the new regulations for special funds creates the possibility of investing in all kinds of asset permitted by the Investment Law without needing to take into account the legally prescribed fund categories. Only special funds that have the form of a hedge fund now have to belong to a specified category.

KAGs can now create Spezialfonds from separate capital, but are not obliged to do so. The only requirement is that the principle of risk diversification be respected. As far as the concrete application of this general principle is concerned, the current consensus is that the separate capital must contain more than three different individual assets. Finally, the KAG is responsible for respecting this principle. In cases of uncertainty, the KAG must justify and document its decision.

The condition for deviating from the established fund categories is that the investor must agree and the special fund must stick to the asset classes permitted by the Investment Law. BaFin, the financial regulator, understands the permitted asset classes to be those that are named in article 1 paragraph 2 and article 2 paragraph 4 of the Investment Catalogue. This means special funds can invest in both traditional investments, like securities, simple derivatives and property and precious metals as well as in company equity that can be valued on the market and uncertificated obligations, like exchange or debt certificates. This means Spezialfonds can now satisfy investor demand for innovative niche products that were previously only available via certificates or direct investments.

Removal of the investment limits

A further change is that the investment limits for Spezialfonds were removed. In order to deviate from the investment limits, investors must give their permission. It is now possible to deviate from the traditional ‘5-10-40%’ rule.

Nonetheless, these new freedoms are limited by the existence of certain requirements from which special funds cannot derogate. Special funds cannot ignore the 200% leverage ceiling prescribed by the Derivatives Regulation, even with investors’ permission, and nor may they short-sell. They cannot take on credit of more than 50% of the value of a real estate acquisition or credit of more than 20% of the value of an unlisted equity share. Special funds have to stick to the existing framework when taking credit, even though the limits have been raised to 30% and the preamble to the new law states explicitly that a “broadening of the investment limits” is envisaged.

Administrative simplification

Further simplifications for special funds include blanket permission to use Depotbanks, a simplified way of limiting share take-back and the possibility of carrying out direct real investments via investors. It is no longer necessary to have an independent board if the KAG only runs Spezialfonds.

Peculiarities of the special investment company

The new law creates the special investment company alongside Spezialfonds. Compared to a public investment company, the special investment company has certain differences. All shares may participate as company shares with full voting rights in the general meeting. Unlike with public investment companies, owners of company shares do not need to be registered with BaFin. Furthermore, there now exist “investment shares” with no voting rights alongside the aforementioned company shares.

So far, there are no reliable figures on the number and size of investment companies. It is nonetheless certain that a substantial number of these vehicles has been established. Most of these have external management. This means that a KAG is in charge of all administration, meaning that the special investment company needs no in-house organisation. The main claimed advantage of the investment company over the traditional special fund is that the structure is more easily understood. Many, especially foreign, investors are very familiar with the concept of a limited company, but have had trouble understanding the concept of separate capital. For this reason, the number of investment companies is certain to rise.

Investment possibilities for special investment assets are much broader than for public investment assets. Time will show what kinds of extra products will be developed.

The composition of investors

The composition of a Spezialfonds’ investors has since 2006 been established on the basis of the data provided by the BVI. This also explains why “insurers” as an investor category means something different in BVI statistics compared to its meaning in previous surveys. The BVI’s data are based on reports from the Deutsche Bundesbank. The Bundesbank separated institutional pension provision out of the insurance company category in 2004. For both the BVI data and the Bundesbank data, the rule is to assign the full volume of Spezialfonds held by several institutional investors to the investor group which holds the largest share of these special funds.

In 2007 there were only small changes to the composition of investors. The only noticeable shift was between credit institutions and other economic enterprises. Credit institutions’ share of special fund volume fell by 1.7 percentage points to 20.7% over the course of the year, while the share of other economic enterprises, including industrial foundations, employers’ groups and industry organisations, rose by 1.4 percentage points to 17.2%. In absolute terms, the ‘other economic enterprises’ have invested around €138bn in securities special funds. Credit institutions hold €146bn in securities special funds.

Investor composition differs somewhat depending on which KAG group is looked at. The investment companies that are subsidiaries of insurers have shown a sharp increase in the number of investors from the insurance world. This share has risen from 69% to 81% over the past year.

In 2007, the share of economic enterprises investing with insurance subsidiaries has fallen. It fell from 18% to 11%. On the other hand, the share of economic enterprises (including credit institutions) rose from 34% to 38%, and in the case of savings banks from 59% to 62%, and from 25% to 32% in the case of foreign banks. These numbers indicate that insurer subsidiaries are making a greater effort to attract insurers as investors, and that companies that are part of the credit business are increasingly finding investors among economic enterprises and banks.

Market share by provider group in the Spezialfonds sector

The market share of different provider groups in the securities Spezialfonds sector was established using BVI data. This data includes Luxembourg special fund providers based in Germany. In first place come companies linked to insurers, whose market share rose from 25.5% to 27.4%. The market share of savings banks and girobanks remained constant at 22% - with administered assets of €147bn. Companies in the private bank sector improved their market position with an increase of 0.6 percentage points to 16.2%. Foreign bank subsidiaries lost 1.3 percentage points and had a market share of 14.9% at the end of 2007.

Outlook

In past years, as part of the process referred to as the “breakdown of the value creation chain”, the division between administration and portfolio management has become sharper. Since then, the investment and asset management sector has changed fundamentally. KAGs facing international competition have the challenge of further developing innovative fund products as well as improving execution and providing more flexible management methods in the case of Spezialfonds and free financial portfolio management. If they succeed, this will allow institutional asset management to further improve its standing in future.

Till Entzian is a lawyer based in Frankfurt and consults on Spezialfonds. (enzian@kagg.de)

For more than 30 years Dr Hans Karl Kandlbinder, the orginator of the Spezialfonds concept, presented the Kandlbinder Report on Spezialfonds for the previous year. This year’s report is authored by Till Entzian.

A German version appeared recently in the Zeitschrift für des Gesamte Kreditwesen published by Frankfurt-based publishers Fritz Knapp Verlag