In Germany, private banks are usually thought of as staid institutions that have served the country’s rich since their beginnings in the 18th century.
Serving high net worth individuals - and being every bit as discrete about it as their Swiss peers – explains much of what the likes of Metzler, Trinkaus & Burkhardt and Sal Oppenheim do. What is less known, however, is that these three houses have also emerged as important bankers for institutional clients, especially when it comes to asset management.
While all three manage considerable asset volumes for institutional clients, Metzler and Trinkaus & Burkhardt have had more of an impact as fund administrators, promoting so-called ‘master funds’. The products, which centralise back-office administration of institutional funds to cut costs and boost transparency, have brought in just under €10bn for Metzler and more than €27bn for Trinkaus & Burkhardt. Sal Oppenheim, on the other hand, has made a name for itself as a portfolio manager. Investment consultants in Germany say the house’s strengths lie in bond funds of many types and quantitative equity products`.
Due to its strength in fixed income, Oppenheim KAG, the bank’s asset management arm, has done particularly well among German pension funds, which, with 70% to 90% of their portfolios currently invested in bonds, have a pressing need for it.
Oppenheim KAG has also further broadened its appeal among the funds by offering advice that is typically handled by an investment consultant. These services include the compilation of an asset liability study as well as advice on asset manager selection. As a result, pension funds currently account for 39% of the total €16.8bn in institutional assets under management (AUM).
Rupert Hengster, chief executive of Oppenheim KAG, observes that as pension funds maintain a high exposure to bonds, “they are looking to us to provide higher returns within this asset class which we can deliver with spread products like high yield, emerging market and asset-backed bonds”.
Hengster, who was recruited in 2004 from WestAM, another fixed income specialist, also stresses that Oppenheim KAG has been doing well among pension funds because of its quant products. “These products are perfect for pension funds, as they enable them to be exposed to equity markets and at the same time satisfy their concerns about risk,” he says.
Indeed, Hengster says that pension funds, along with insurers, will make up more than half of Oppenheim KAG’s future institutional business. The other portion will come from banks, especially, the Sparkassen, publicly-owned savings banks, corporates and religious organisations.
The future business should, in turn, enable Oppenheim KAG to lift institutional assets to €18bn by the end of 2006, says Hengster, adding that after then, the volume should grow by around 10% annually.
Among Versorgungswerke, or pension funds aimed at professional bodies, Hengster aims to raise the number of clients to 50 from 28. He also would like to ultimately do business with 100 Pensionskassen, or traditional pension funds, compared with 37 at present.
That insurers are as important to Oppenheim KAG as pension funds is no surprise. The asset manager is based in Cologne, one of Germany’s biggest insurance centres, and until 1989, its parent owned one of the city’s top insurers. German life insurers also have a great need for fixed income specialists, as they, like Pensionskassen, offer a guaranteed return on contributions, which is currently 2.75%.
Despite Oppenheim KAG’s success among German pension funds, Hengster agrees that the funds are probably overexposed to fixed income and should diversify more into other asset classes to achieve higher returns.
He suggests that if pension funds have not already done so, they should allocate another five-10% to equities, though not just European ones but also those in the US and elsewhere. To further boost returns, Hengster feels that they should be invested in real estate and allocate another 10% to private equity and fund of hedge funds. However, the CEO does not share the view of other asset managers - particularly those at market leader Allianz Global Investors - that the long-awaited boom in German corporate pensions has finally begun.
“Since 2002, when the Riester pension (a defined contribution scheme to which every worker has a legal right) was launched, there was a lot of talk and a lot written about a boom. The trouble was this wasn’t reflected in the inflows,” he says. “Now that Riester was simplified and improved at the beginning of 2005, we might have a new situation, but I haven’t seen it in this year’s inflows.”
Still, Hengster believes that the pensions boom will come, though until then, he says asset managers must work with the industry as it is currently configured. Germany currently has around €370bn in corporate pension assets.
Regardless of what happens, Oppenheim KAG is not putting all of its eggs in the German basket. It already has built a presence in Switzerland and in Austria, where it has racked up €830m in assets. Expansion into the Benelux countries, which includes the huge pension fund market of the Netherlands, is also on the cards.