Germany: A study of dream versus reality
Spezialfonds investors would ideally like greater exposure to higher-returning real estate, alternatives and equity, according to Hans-Jürgen Dannheisig and Clemens Schuerhoff
Asset allocation is universally recognised as the key ingredient of investment performance.
When we were commissioned to survey decision makers at Germany’s key investment groups about their investment strategy, as well as their ideal allocation, professionalism dictated that we should analyse the discrepancy between the ideal strategy and the status quo. Kommalpha conducted precisely such a survey on behalf of Germany’s investment and fund management association BVI.
No systematic survey of the range of institutional investors’ allocations is conducted in Germany. While some associations do record such information, it is not published close to its date of collection and an overview of all relevant investment groups is also not available.
Here, we aim to present a valid sample of current investors, using their answers regarding their ideal allocation to draw conclusions about the impact of governmental and individual investment guidelines.
The survey, conducted online in the third quarter of 2012, attracted responses from 134 institutional investors, with overall assets of around €380bn, accounting for a representative sample of the €900bn held by the vehicles overall.
Around 40% of respondents are investors governed by Germany’s insurance law (VAG) or similarly strict legislation (insurance companies, occupational pension funds, social insurance providers as well as church funds and professional first pillar funds), 15% credit institutions, 14% other finance intermediaries such as leasing companies, 5% non-profit private investors (church and union funds) and 2% local authorities, sickness benefit associations and company foundations. However, 21% of respondents did not reveal the nature of their business.
A further 20 respondents answered further detailed questions in later interviews, to allow our hypotheses to be confirmed.
Our survey questioned investors accounting for half of the volume invested Spezialfonds, the German vehicle aimed specifically at large-scale institutions and often tailored by fund managers around an institutions’ individual needs.
Alongside this, however, institutional investors often seek direct exposure to equity, fixed income or other financial market instruments and asset classes. They further also make use of mutual funds, initially and primarily aimed at retail investors.
Current asset allocation
Respondents were deliberately drawn from varying regulatory environments and as expected, across all groups, the reported allocation was in line with results reported in .
Equity investment is, at 12%, perhaps even slightly higher than expected. However, the allocation within companies regulated under VAG, the allocation declines to 9%. Occupational pension arrangements reported at 13.23% significantly higher exposure to stocks than insurance companies (5.78%).
Even in such a restrictive environment, a whole range of investment approaches was to be found. Some respondents reported no exposure to equity at all, while one respondent said 24% of assets were invested in the stock market.
Ideal asset allocation
Respondents were also asked – in addition to their current allocation – to detail their desired asset allocation, if their only concern was the vehicle’s stability and its ability to meet obligations and without any other restrictions.
Under such conditions, those investing in Spezialfonds said they would double both exposure to real estate and equity. The target allocation to alternative investments, such as infrastructure, grew two-and-a-half fold in such a scenario.
At present, institutional investors have 61% of Spezialfonds assets in fixed income investments – but the desired level measures only 41%.
Sovereign bonds and Pfandbriefe in particular suffered from this loss of importance, with a desired allocation of half the current exposure. In contrast, corporate bond exposure would grow from 15% to 19% of Spezialfonds investment.
Commenting on the shift, Thomas Richter, CEO of BVI says: “The yield from developed nation sovereign debt is no longer able to deliver the returns desired by institutional investors. Many investors therefore want to increase the weighting of higher-returning asset classes. However, the incoming solvency capital requirements under Solvency II appear to be stopping them from acting on this desire.”
Property, alternatives and equity
Institutional investors of course cannot avoid holding some government bonds and other fixed income assets within their portfolio – but if these supposedly secure assets are no longer able to deliver sufficient returns to meet set targets, an overhaul of the underlying portfolio is the only option.
“Nowadays everyone is on the lookout for a sensible yield-replacing investment,” commented one head of portfolio management at a large insurance company.
“Due to economic developments, we should rightfully be implementing portfolio changes a lot faster,” said the managing director of a Pensionskasse.
The equity exposure of Spezialfonds would therefore, disregarding legislative restrictions, double from 12% to 24% if institutional investors had their way. Property would increase even more, rising from 6% to 14% of total investments.
The largely still undefined alternatives asset class has long been discussed, but nonetheless remains a marginal area for most investors. Today, however, most everyone does their best to grow exposure in the asset class, although a number of interviewees note that despite increased efforts, concerns remain over commitments. Interviewees also stressed that the restrictions do not stem solely from legislation, but that in many instances the “uncertainty of committees has grown significantly”.
Despite this, decision-makers would still like to increase the percentage of Spezialfond exposure to alternatives from its current 6% to 15%.
Follow-up interviews often revealed company-specific reasons for this discrepancy.
Due to the low yield environment, the BVI has spoken out in favour of changes to the regulatory framework, emphasising a proportional and sustainable investment approach.
Richter says: “Occupational funds must invest to guarantee appropriate yield and protect against inflation. Therefore, institutional investors should be allowed to increase their exposure to property and infrastructure, without the need to concern themselves with increased solvency capital requirements.”
Insurance companies and similar investors, however, kept referring to the protracted and disproportionate debate surrounding Solvency II, rather than the potential implementation of the regulation, as the hurdle stopping them from implementing any changes to their portfolio.
German institutions’ portfolios currently do not fulfil their desired asset allocation, nor do they take account of economic realities. A proportional and systemic legislative framework, as well as the ability to invest employing the prudent person principle, is currently not possible.
Insurance-based investors in particular are currently availing themselves of all legally available avenues to enter and exploit new asset classes. Spezialfonds will continue to play an essential role in this respect.