Living in tougher times
Too high expectations regarding the development of the pension industry in Germany during this year have resulted in disappointment among the asset management community. The forecast growth in assets that the pension reform was supposed to bring into the institutional arena has not materialised, partly due to market conditions but also to legal uncertainties regarding the new retirement vehicles.
The year started with bad news for the Spezialfonds industry that in 2001, for the first time in the 34 years history of this investment instrument, recorded a fall in fund volume of 1.4%, according to figures released by the German Bundesbank in February.
However, and according to the latest Kandlbinder report (IPE September 2002), this fall shouldn’t be seen as a sign that the Spezialfonds market is entering a negative phase, but more as a consequence of the global downturn in the markets.
Significant or not, the truth is that decreasing volume of assets under management have put extra pressure on asset managers in Germany in search of new business. Market underperformance and the pensions reform have forced Germany’s investment management banks, KAGs, to restructure their businesses and their approach to investment, which should be seen as a positive step.
“Twelve months ago everybody was working on the pensions issue, trying to establish the right structure to meet the expected demand. No one really knew how big this demand would be, but we all wanted to be ready,” says Andreas Krebs, head of consultant relations at ComInvest Asset Management. Cominvest, with around E630bn under management, is the new name under which the three German-based investment divisions of Commerzbank – Commerzinvest, ADIG and Commerz Asset Managers – operate since they merged in September. “Twelve months later we find that now everyone is more or less ready and hoping to see new assets coming into the market.”
Some have described the pension reform as a failure, especially on the issues related to development of the Riester third-pillar plans, but on the whole the reform has been positive to change the attitude among Germans towards retirement provision. “One of the good things about the pension reform is that it has made people realise that the pay-as-you-go system is not enough,” says Peter Koenig, executive director at Morgan Stanley in Frankfurt. “Under the new framework every beneficiary will receive a statement with the details of their state pension that will work as an eye-opener making people think more seriously about their provision for retirement.”
Koenig adds: “Another positive aspect is that the reform has allowed the development of the second pillar in Germany and this is very important.On the other hand, the negative aspects are that in general the whole legal framework is too complicated contemplating too many different pensions arrangements which confuse people.”
At DG Panagora in Frankfurt, executive manager Marc Bechtel agrees: “It’s true that we all expected a lot more coming from the pension reform. It is not doubt a first step in the right direction but many things will have to be changed to make it a success.”
However, and even the Riester plans have not been very attractive to individual investors, on the second pillar things are looking a bit better and important new occupational schemes have been established. Among them is the chemical industry’s sector-wide supplementary pension fund, Chemie Pensionfonds, that has attracted around 160 large and mid-size companies in the sector, representing around 100,000 workers. Another example can be found in MetallRente, the Berlin-based retirement provision company for the metal, electronics, steel and textile industries that offer its member three types of retirement solutions, direct insurance, the traditional Pensionskasse or the new Pensionsfonds. MetallRente currently represents around 500 companies and around 650,000 employees.
So even though in terms of assets the market has grown as expected quite a lot has been done on the organisational side, and asset managers have responded to the new environment by restructuring themselves.
ComInvest’s Krebs comments: “So on the organisational side we have seen a lot of progress during the last few months and this will affect the way our industry is structured in the future.” The creation of Cominvest is a clear sign of the reorganisation of the market. The company, that two years ago brought together its portfolio management divisions, decided to go further by merging its institutional and retail business under just one entity.
And this has not been the only case in the market. Consolidating business divisions, mergers and joint ventures with other providers have been for several KAGs the best solution to face the pressure of decreasing revenues in the asset management business as a whole. In some cases, this consolidation has proved to have a negative impact on the parties involved, at least in the short term, due to confusion and concern among clients during the restructuring processes. A good example has been the merger between Dresdner and Allianz that resulted in Dresdner loosing mandates from insurance companies that didn’t want their assets to be managed by their competitors. However, after the merger process was concluded, investors’ trust up to some extent recovered.
“There were some initial negative impacts as a consequence of the merger,” says Michael Korn, director at Dresdner Bank Investment Management, in Frankfurt. “But now our efforts to make the process as smooth as possible are starting to pay off, and as a joint institution we have been able to gain market share and new mandates during this year.”
At the investment funds association BVI in Frankfurt, deputy managing director, Rudolf Siebel says: “Consolidation is something that is happening in this market and the number of KAGs is decreasing through mergers and acquisitions. However, I don’t agree with some forecasts that say that there will be only be around 15 KAGs in a few years. I don’t think the number will shrink that much.” He adds: “What we are increasingly seeing is a trends towards ‘instividual’ structures where KAGs merge their institutional and retail business and put all their assets under management under the same roof.”
Joint ventures also appear to be the best solution for those wanting to expand their investment capabilities and products and in some cases the right partners are being found abroad. This is the case for Helaba Invest that some time ago decided they needed to find a partner that could give them the right exposure to niche investment products. “In order to complement our competencies we knew we wanted to enter a partnership with an US manager, and we also wanted to have exposure to the corporate bond market,” says Uwe Trautmann, managing director at Helaba Invest in Frankfurt, with E8bn institutional assets under management. “Corporate bonds had been managed in the US for years so after searching for some time we thought Northern Trust was the right company.” Helaba Northern Trust started operating in August last year and since then has attracted around E1bn from institutional investors across the German-speaking market. “We have been successful because we launched the right product in the form of our jointly developed investment approach, with the right partner, at the right time,” Trautmann says. In January the joint venture will be launching a high yield product and “when German investors are more interested in US equities we’ll be looking at launching a product in this area, but this is not the case for the time being. We’ll go step by step”.
So corporate bonds and high yield are definitely some of the products German investors are looking at, but in general what they are asking for at moment is anything which can bring absolute returns to their investment portfolios at the end of the year.
“This is a trend that might change in the future but currently what investors want is quality total returns products that can guarantee absolute performance at the end of the year,” says Bettina Nürk, manager for institutional clients at DekaBank in Frankfurt.
Investors, especially insurance companies are in a position where the risk budgets do now allow them to take more risks and everybody is talking about bonds.
“Institutional investors in general have become more risk-adverse,” says Harald Glocker managing director at ABN Amro in Frankfurt. “There is a trend towards a broader diversification of the bond portfolio and even though corporate bonds are becoming more important people want to avoid nasty surprises coming from some corporation as it happened in the US. A way to avoid this is by reducing the proportion invested in each specific company and broadening the list of companies they invest in,” he says.
On the other hand exposure to alternative asset classes such as private equity and hedge funds is not high on institutional investors’ agenda. “Hedge funds and private equity have a more satellite character and even though people are discussing alternatives if we talk about big money not much is happening here,” says ComInvest’s Krebs.
Competition among managers is tougher than ever and even though the usual suspects still control a large proportion of assets under management, small specialist players are also finding their place in the institutional arena. Although balanced mandates are still predominant, and the move to specialist strategies seem to have slowed down a bit as a result of the volatility in the markets, the interest in a core-satellite approach is still there, and those who can offer a serious alternative to traditional asset management have important chances to see their business growing.
This is the case for DG Panagora, that has managed to attract interest from investors in its quantitative approach to investment. “Our approach is so much about risk control that at times like this investors want to know more about our products and despite the performance of the market as a whole we didn’t loose any mandates,” says DG Panagora’s Bechtel. “Currently institutional investors in Germany are going through are review process, trying to design the investment approach they should follow in the future. There will be some changes in strategies and managers and we think this could benefit players like ourselves. Investors will go for managers that can prove they work in a different way than the traditional investment houses.”
This trend is also helping the growth in market share of foreign asset managers and according to Hartmut Leser, managing director at Bad Homburg-based Feri Institutional Management, around 20% of new mandates are going to foreign houses. “Institutional investors in Germany are now more open to hire foreign providers because what they want is to hire someone that can offer the best investment solutions no matter whether they are German or not,” he says.
At ABN Amro, Glocker says: “It is still difficult to compete with local names but more and more investors are more open to accept ideas coming from non-domestic players. We have the advantage of being a continental player with an Anglo-Saxon know-how and investors appreciate this.” He adds: “On the other hand investment consulting is becoming more popular and this is very important for ourselves. We see consultants as a very important factor in our strategy to increase the market share of our products and services among German institutional investors.”
At ComInvest, Krebs comments: “The role of invesment consultants is increasing partly due to the developments in the market. Investors want to know what they can do to improve performance and who is out there to help them doing so. But on the other hand German investors have to get used to paying for these services and this will take some time.”
Although all agree on the fact that the real growth of the institutional asset management business will have to come from pensions money, in the mean time other institutional investors, especially insurance companies and saving banks are keeping asset managers busy. The in-depth review proccess that German institutions have been through for the last year or so is coming to an end, and investors will now have to act. For the new year new mandates will come into the market and asset managers are looking forward to showing investors they are ready for new challenges.
“If capital markets catch up in the months to come, there will be new mandates out there soon and fierce competition to offer quality investment products especially value-oriented equities,” says Morgan Stanley’s Koenig.
While waiting for this to happen the asset management market in Germany will also have to concentrate its efforts on a major development that could change the industry dramatically in the years to come: the development of master KAGs, multi-manager structures that will consolidate even further the industry (see page 28).