Siemens targets Mittelstand plans
With 450,000 employees, Siemens is Europe’s largest employer and ranks among the biggest globally.
While the group’s pensions liabilities at E19bn may not be the same as some of the giant US corporations, Siemens has been making determined efforts to put in place a structure that would not just manage these commitments, but would use its enormous industrial strength and leverage a financial services operation from this. From this thinking emerged Siemens Financial Services (SFS) five years ago – its first forays were into areas such as equipment leasing and structured financing, and more recently asset management. All told SFS now employs over 1,370, based mainly at its Munich headquarters.
In fact, Siemens has undertaken investment management for the group internally for 20 years and in 1992 took the revolutionary step for a German corporate of setting up the Siemens KAG(SKAG), giving it the ability to run its assets and set up its own investment funds. It has always managed the assets earmarked to cover the group’s German pension liabilities, which were formally ring-fenced a few years ago through the Siemens Pensions Trust, a contractual trust arrangement.
Now SFS investment management has taken a long predicted step – that of moving into third party asset management, based on the approach long practiced in-house for its largest client, Siemens. It is the second part of SFS to take this step – the in-house Pensions Advisory operation that provides pensions consultancy services to Siemens world-wide, moved quickly to offer its services wider and now has more clients external to the group than internally.
The SFS investment management division is headed by Wolfgang Lotze, who was appointed last year to integrate the asset management operations within SFS, the biggest part being SKAG, which accounts for 70% of the 100 people working for the division. It manages assets of around E9bn.
“Our mission is to serve as the captive asset management operation for Siemens in Germany, as that is our origin and how we have grown,” says Lotze. “What we want to do now is to move the focus from internal to external, without losing our internal appeal.”
One of the first steps was to organise a sales function, which involved recruiting Rainer Beutler, as head of institutional sales. He joined from Lazards, where he was responsible for developing institutional accounts in the German and Austrian markets. His initial focus will be the domestic market, but that does not rule out eventually going to other European markets in search of mandates.
“Talking to external clients requires a different approach in articulating our process,” says Lotze. But it was not a question of changing these investment processes, where SFS believes it is bringing something different to the market. “It is a very disciplined, highly quantitative top-down approach, distinguishing us from our competitors. We have a good track record.”
“We are active managers,” explains Lotze. “We follow a top down approach and customise the investment strategy depending on the clients’ benchmarking needs. Where we have a balanced mandate, we would implement our tactical asset allocation regarding fixed income and equities. Within a global mandate in a first step we discriminate between regions. Then in a second step, we manage duration in the fixed income part and sector allocation for equities.”
The process enables both specialist and balanced approaches to be provided, but balanced products are still widely used in Germany, he points out. “Our top-down methodology differentiates us from others who are bottom up managers.
“The investment process is made up of a number of steps, of which the most important is returns forecasting for TAA and sector allocation funds respectively duration amanagement. The other area is portfolio construction, where we use state of the art software from Barra to optimise, gievn the overall risk tolerance, and especially the tracking error acceptance of the client.”
Execution is done by SKAG’s own team of 20 portfolio managers, some of whom have been managing assets for Siemens for 20 years. “The next step is control for performance and risk of the implemented bets, with the final step portfolio communication.”
Lotze says much attention has been paid to client servicing. “We want to differentiate ourselves from our competitors, so that clients understand our approach, so that they are comfortable. The details are reported to clients on a monthly basis, describing the portfolio’s positions and how it developed.”
Beutler says that there has been a very positive reaction to the Siemens approach from institutional investors. “They appreciate our transparent approach, as they understand how it works and how we make decisions. The signals we are receiving are positive.”
Lotze believes that potential clients appreciate that Siemens is coming into the asset management business from the same side that they are on – that of a plan sponsor and corporate investor. “Our natural clients are industrial companies and their pensions assets, though we are not limiting ourselves to those clients. Many of these are Mittelstand companies, with perhaps as much as E1bn in pension provisions.” But he also sees opportunities among the subsidiaries of international groups operating in Germany.
Some clients are talking about using the pension trust approach that Siemens uses, but Lotze says that SFS will not be a Pensionsfond provider, though it expects to have these facilities through another financial services group. SFS will be providing Spezialfonds through SKAG and SFS will be willing to act in an advisory role to Spezialfonds clients may have already. PensionsAdvisory is actively involved in providing asset liability management studies, should clients require these and other pensions advice.
The SFS range of ‘no load’ mutual funds, managed by SKAG, are currently offered to Siemens employees in Germany and the intention is to make these available to other employers. Riester pension plans are being provided through the SFS in-house insurance arrangement. The successful Innovest asset manager based in Austria which is a Siemens subsidiary, also comes under the SFS umbrella. Lotze hopes to be able to offer its range of mutual funds in Germany shortly.
Lotze says that SFS has followed the “international approach to fees”, which means that these are higher than those normally charged by domestic KAGs, but a full breakdown is given as to transaction costs, custody and other charges, but fees will be lower than some of the foreign managers.
The decision to go into third party asset management was originally taken in 1999. “We would like to see 20 to 30% of our assets come from external mandates in the next three to five years,” he says. “We know there is very significant competition out there, but the barriers to cross border activities are dropping, particularly in Europe.”