Net inflows of pension funds and insurance companies in Spezialfonds have fallen drastically last year, almost coming to a stand still, according to the latest Spezialfondsmarkt quarterly report published by Kommalpha.

Pension funds’ Spezialfonds collected only €1.3bn net in 2023, €35bn below the level of net inflows recorded in 2022, according to the report.

For insurance companies, the net funds raised by Spezialfonds in 2023 amounted to a “measly” €461m, from €11.4bn in 2022, a figure that, taking a long-term view, was already quite low, it added.

Since 2010, net inflow of funds into Spezialfonds has never been as low as in Q4 2023, with only €7.5bn raised, compared with €11.9bn in 2022, the report noted.

“The sometimes high need for liquidity, as well as the current and uncertain interest rate environment have deterred investors from investing in Spezialfonds,” Ralf Jonass, head of business development and client management at HSBC Deutschland, wrote in the report, commenting on the figures.

He added that clearly pension funds have withdrawn money from their mandates last year.

Pension institutions pumped €13.3bn of new funds into Speziafonds mandates, withdrawing €11.2bn in 2023, the report added. In total, close to €220bn were pumped into Spezialfonds in 2023, down from €308bn in 2022.

“Not even a fifth of fresh injected liquidity remained net in Spezialfonds mandates in 2023,” said Clemens Schuerhoff, Kommalpha’s managing director.

Clemens Schuerhoff Kommalpha

Clemens Schuerhoff at Kommalpha

Rising interest rates means that the liquidity withdrawn ends up in direct investments, in funds or SPVs (special purpose vehicles), or is used for accounting or business purposes by institutional investors, Schuerhoff added.

Increasing interest rates had an impact on valuations of bond holdings in Spezialfonds, with a total of around €53.6bn “burnt” for pension funds in the last two years, if considering also net inflows of funds, Kommalpha said.

The situation is even more alarming for insurance companies, with almost €110bn lost due to market corrections and valuation effects, the result of higher exposure to bonds with sometimes long durations, compared with fixed income allocations of pension funds, Kommalpha explained.

Net inflows are now largely dependent on the current level of interest rates making investing in classic direct investment products significantly more attractive, said Stefan Adam of DZ Bank.

However, the low level of net inflows of pension schemes and insurance companies in Spezialfonds seen in 2023 will continue in the next few years, and figures in the high double-digit billions per year are unlikely to return, Kommalpha added.

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