At the end of the first half of this year, German asset manager Cominvest trailed its domestic rivals in terms of market share for institutional funds, according to rankings from German fund association BVI.
Cominvest should nonetheless be satisfied with its first-half performance. If there had been a ranking for innovation in the institutional fund business, the asset manager for Commerzbank, Germany’s fourth-largest bank, would arguably have taken first place.
That’s because Cominvest became the first of its rivals to exploit a growing niche in the German institutional market
for clients that want the benefits of institutional funds (Spezialfonds), but that do not meet the minimum investment required to set them up.
German institutional clients prefer Spezialfonds for several compelling reasons. First, the fund offers a high level of diversification by awarding mandates to asset managers worldwide. Equally attractive is the control over the asset managers that a Spezialfonds affords investors. Also, the fund offers low fees and is tax-privileged.
The Spezialfonds market is exclusive though, as the investment threshold is typically €50m and higher. Hence, smaller clients like small- to mid-size enterprises (SMEs), or church-related organisations, have often had to settle for sub-standard funds.
To remedy this, Cominvest last January launched so-called ‘multi-manager funds’, which share a key benefit with Spezialfonds, namely a high-level of diversification thanks to asset managers around the globe. Yet since they are mutual funds, the products are accessible to smaller institutional clients.
Instead of creating the funds itself, Cominvest sourced them from SEI, a leading provider of the products based in the US. SEI was only too happy to oblige. Cooperating with Cominvest meant that it became the first international provider to break into the extremely high-volume German institutional market.
The venture got off to a good start. Drawing on Commerzbank’s sizeable presence in Germany, Cominvest has persuaded 250 SMEs to invest in SEI’s multi-manager funds. Net inflows to the funds currently total €150m, which is already above Cominvest’s expectations for the year.
Michael Vogt, senior vice president at Cominvest, says: “The feedback from our corporate clients has been very positive. They like the fact that for relatively small sums of money, they get the same diversification a Spezialfonds would offer. Some of our clients
are already thinking about raising the level of their investment
next year.”
Cominvest currently offers two SEI funds, a low-risk one whose breakdown is 20% equities and 80% bonds, and a moderate-risk one which has has 40% equities and 60% bonds. Clients can invest in the funds with as little as €100,000 and soon will be able to do so with as much as €10m.
Once Cominvest brings in the money, SEI, acting as a consultant, channels it to the global asset managers it has chosen to work with. SEI’s 64 investment professionals then closely monitor the asset managers to ensure that they meet performance goals. If they do not, they are replaced.
Stephan Römer, head of institutional business development for Germany at SEI, observes that this approach enabled investors to get “the best of the asset manager breed. Real-time monitoring on fund holdings is another significant advantage,“ he says.
Römer adds that SEI funds are even competitive on price owing to the provider’s considerable economies of scale. Considering that SEI currently manages €100bn in assets via its multi-manager funds, he may have a point.

Following the good reception of SEI’s funds among SMEs, Cominvest plans to offer them to other small institutional clients barred from Spezialfonds. These include the foundations and ecumenical organisations as well as small pension funds. All told, Cominvest expects demand for the funds to grow around 25% for each of the next five years.
Cominvest’s experience shows that a new market for multi-manager funds is definitely emerging in Germany, even if the volume is likely to remain a fraction of the hundreds of billions of euros managed by Spezialfonds.
Vogt says it’s likely that other big German asset managers will go after a share of new market. Yet he adds that if they do, they probably will look to Cominvest’s cooperation with SEI as the model.
“Any big German bank, whether us, Allianz-Dresdner or Deutsche, has the resources to create the kind of multi-manager product that SEI has,” Vogt says. “But because economies of scale matter in the multi-manager fund business, one would have to ask whether it makes economic and strategic sense to do so. Cooperating with one of the four or five big international players would probably make more sense.”
Vogt’s sentiment was echoed by Andreas Schneck, director of institutional business at Ampega, a Hanover-based asset manager. Schneck estimates that a German bank would need €1bn to create the same sophisticated multi-manager architecture offered by SEI or its arch-rival, Russell Investment Group.
Schneck says: “In these market conditions big German banks are simply not having the seed money to launch a full multi-manager platform. In addition they would need to team up with an investment consultant to raise their profile.”
And as if to confirm Schneck’s feeling, the asset management arm of HVB, Germany’s second largest bank, has cancelled a plan to create multi-manager funds.
Meanwhile, SEI, which has opened a sales office in Munich, plans to offer its funds to big institutional clients in Germany, in particular corporate pension funds (Pensionskasssen). The move would not involve Cominvest, as the two partners’ cooperation covers only small- and mid-size institutional clients in Germany.
Schneck doubts that big institutional clients will be interested. He argues that multi-manager funds cannot compete with Spezialfonds on price. More importantly, he adds, large institutional investors prefer to be in direct contact with asset managers, a privilege they wouldn’t get with multi-manager products.
In any case, multi-manager funds for the German market will not just come from international providers like SEI. While the best known German asset managers are reluctant about the concept, lesser known houses have gone ahead with plans for home-grown multi-manager funds.

The best example is Universal Investment, Germany’s largest back-office administrator of Spezialfonds. Back in January, Universal said it had teamed up with German consultant Feri Trust and Multi-Manager Fonds Consulting (MMFC) to launch both a multi-manager bond and equity fund. Under the venture, Feri is the asset manager coordinator, while Universal is responsible for back-office administration and technology. MMFC is to sell the funds to clients in Germany.
Unfortunately for the partners, the launch of the funds had to be postponed until 1 October as they did not attract the necessary €100m in start-up capital. This has allowed Cominvest and SEI to get a big headstart in the new multi-manager fund market.
Thomas Horchler, managing director at MMFC, says the initial failure to attract the capital had nothing to do with the lack of interest in the funds, but rather with the lacklustre performance of financial markets.
Still, sceptics like Schneck doubt that German multi-manager providers have much of a chance, especially if they are up against houses like SEI. “They simply don’t have the same global reach, so I wouldn’t overestimate their impact,” he says.
“They might gain if they structure multi-managers for the local market needs, but will not be able to compete internationally,” he adds.
However, Horchler replies that his funds stack up very well to SEI’s. “While our sub-adviser Feri may not have the same kinds of connections in Japan or easten Europe as an SEI, it does work with global asset managers like State Street and JP Morgan,” he says.
Horchler adds that his funds are also more transparent than those from SEI because the reporting is done in German and not in English. As a result of these factors, he predicts that once the funds are launched, they will do even better than SEI’s, taking in €500m by the end of 2005.

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