Till Entzian surveys Germany’s €1.3trn Spezialfonds market, which saw record inflows over the course of 2015

At a glance 

• Record Spezialfonds inflows in 2015 at €107bn but relative growth at 9.2% is in line with previous years.
• Overall 2015 asset growth was €84.8bn.
• Net inflows of €43bn in H1 2016.
• Spezialfonds assets now total €1.3trn.
• Insurers predominant as Spezialfonds investors in absolute terms and in inflows.
• Pension funds account for €295bn.

For the fourth consecutive year, the Spezialfonds sector has seen record growth in absolute terms, a trend which looks set to continue. For the first time, inflows were in excess of €100bn and overall assets rose by €84.8bn to €1.25trn by the end of 2015 (figure 1).

However, these figures should be viewed from two perspectives. The €107bn inflows may be higher than ever in absolute terms before but, compared to end-2014, the overall increase amounts to only 9.2% in relative terms – a good rate of growth but not record-breaking. Also, when viewed as a percentage of the total, inflows in 2010 (10%) and 2012 (11.4%) were higher. 

assets under management and net inflows

assets invested in spezialfonds by investor group

The overall net asset volume increase of €84.8bn takes into account outflows of €35bn, which can be explained by the fixed income markets. Over the first half of 2016, positive fixed income performance benefited Spezialfonds assets, with inflows of €43bn and asset growth of €40bn, boosting total assets by €83bn to €1.34trn.

Assets held outside of investment funds saw only a comparatively moderate increase over the course of 2015, growing by 4.2% from 2014’s level of €363bn to €378bn last year. 

Turning point for mutual funds?
Mutual funds also saw record inflows with €27bn in new assets. Bucking the last decade of average annual net outflows of €1.2bn, mutual funds ended the year with €346bn in assets.

This figure only covers German-managed mutual funds and excludes domestic mutual funds managed offshore – which total €440bn. The lion’s share of these non-domestic assets are managed in Luxembourg, where funds managed by German institutions claim €3.5trn in mutual fund assets – an increase of €500bn, leaving the German industry lagging behind only US and UK funds in terms of volume. 

Luxembourg has shown that it is possible to devise a regulatory framework that promotes asset growth and offers investor protection. Such an outlook has been hampered in Germany by EU legislation, but also the self-serving activities of some active in the market. Those celebrating the record level of assets managed within Germany as of 2015 should note that these figures were achieved despite, not thanks to, the current regulatory environment.  

Investor groups and Spezialfonds
The overall investor structure within Spezialfonds remained unchanged in 2015, and insurers continue to dominate the market, with life insurers growing their assets from €126bn to €135bn. Other types of insurers claim a further €306bn, up from €276bn. Occupational pension institutions accounted for €295bn in assets at the end of 2015, up from €268bn. The market can continue to expect inflows from both sectors in the future. 

Credit institutions invested €131bn in Spezialfonds at the end of 2015, a volume comparable to the life insurance sector. Nevertheless, the amount invested by these institutions declined €6bn year-on-year – with overall exposure broadly static since 2010, compared to a doubling of assets by life insurers over the same period (figure 2). 

Non-financial KAGs, largely companies investing retirement reserves, also saw a slight decline with the volume of assets falling by €8bn to €146bn. 

This compares with a doubling of the assets managed on behalf of private organisations, where assets rose from €63bn to €118bn. However, the investable assets of this sector only rose by €3.3bn, so the change can be accounted for by statistical reclassification; by comparison the total assets of financial intermediaries fell from €56bn to €25bn over 2015. The asset growth of private organisations increased over the first half of the current year, albeit at a less rapid pace, with the total rising by €10bn to €128bn. 

Public and ecclesiastical supplementary pension funds saw Spezialfonds assets increase by €4bn over 2015, ending the year at €67bn thanks to net inflows, while assets from social insurance funds have remained stable at €20bn since 2010. Nevertheless, assets fell to €14bn in 2014, increasing by €2bn by the end of 2015 and rising by a similar amount during the first six months of 2016. However, further growth should not be expected, as the sector does not have significant reserves to deploy.  

The ETF market drives growth in mutual fund sector

The revival of the mutual fund is not due to German retail investors’ sudden interest in domestic investment products, but rather that institutional investors prefer to access certain products, like ETFs, through the structure rather than opting for a Spezialfonds. ETFs are wholly managed in mutual fund structures, and according to estimates 95% of assets within German ETFs are invested on behalf of institutions. 

The advantages offered by ETFs in providing cost-effective and easy ways to manage asset allocation are well known, and a discussion over the merits of physical versus synthetic replication has existed for years. As ETF providers frequently engage in stock lending, the assets within the index are often not held within the fund regardless of which approach is adopted. The hazards are often overstated: for example, some have even warned that neither the contractual requirements of the lender or borrower nor the collateral offer protection. This can be countered by highlighting that all assets employed in any lending programme need to be acquired in compliance with UCITS regulations, meaning the same basic risk diversification rules apply, requiring the same security as the traditional investment fund. 

number and volume of assets invested in german etfs

On the other hand, certain factors, such as provider cost pressure, demonstrate that it is always advisable to exercise close scrutiny of ETFs. An ETF must track the index as closely as possible, so returns must be generated from other sources if management costs are to be covered. This means ETFs may test the legal limits and parameters of the governing legislation to a greater extent than traditional funds, potentially resulting in higher risks for investors if a counterparty fails or if trading is suspended. But institutional investors are well suited with daily bid-offer spreads and any higher illiquidity risks stemming from an ETFs exposure to less liquid markets. 

The development of ETFs based in Germany is pictured in the figure, with the total number of funds remaining largely unchanged at 109, compared to 104 in 2014, mirroring a largely static assets figure for bond ETFs of €5.2bn, down by €600m over the previous year. This compares to equity ETFs, which saw an increase of around a third, to €42.2bn – of which synthetic equity ETFs only claim a small share, accounting for only €600m. 

Germany’s ETF market is small by international comparison, with global ETF assets standing at $3trn, of which €450bn are based in Europe. BlackRock remains the largest provider of such products in Germany, claiming €40bn of assets and €890bn in assets globally as of 2014. As with all other providers, BlackRock intends to continue launching ETFs governed by German law. 

Insurance asset allocation
The statistics shown in figure 3 shows that insurance companies are a significant investor group, with asset growth outstripping other groups. Insurance assets were €579bn at the end of 2015, up by €36bn. This equates to a 6.6% increase, compared to a rise in insurance assets in the same period of only 3%. Total insurance assets are likely to exceed €2trn before the end of 2016. 

It is notable that equity exposure increased by 6%, with bond exposure increasing by 9% – whereas exposure to other asset classes fell by 3%. The regulator BaFin offers a detailed breakdown for primary insurers, which can be seen in figure 3. As the data does not include re-insurers, the figure covers assets of €1.4trn, of which nearly one-third, or €465bn, is invested through funds. 

Similarly noteworthy is the €220bn exposure to Pfandbriefe, and the €209bn exposure to other debt instruments. The insignificant equity exposure of €1.8bn should be noted. The €229bn difference in equity exposure visible in figure 8 is easily explained, as BaFin separates listed equity and unlisted shares, whereas Bundesbank statistics capture both listed and unlisted stocks in a category. 

As figure 4 shows, primary insurers invested €65bn in equities at the end of 2015, a significant increase from the previous year’s €50.9bn. The increased risk appetite is being used to grow exposure to equity Spezialfonds, rather than in directly held portfolios. The trend is not mirrored in the bond market, where directly owned portfolios accounted for €429bn in assets at the end of 2015, compared to €352bn in funds. 

Investor groups and inflows
The spread of net inflows between investor groups reflects the importance of Spezialfonds for each respective group and gives an indication of the origin of substantial flows in coming years (figure 5). Occupational pension providers are the most stable of all groups, committing €33bn in 2014 and 2015 to the vehicle – a trend set to continue in 2016 where they have invested €16bn to date. 

total assets of german insurance companies

assets of primary insurers

The inflows of pension institutions are only topped by those of insurers, particularly casualty and re-insurers, which invested €36bn. Life insurers for their part rebounded from a weak 2014 and 2015, when they only committed €6bn and €13bn respectively. Non-financial KAGs invested €14bn, compared with €13bn the previous year. However, the latter group has seen a negative trend for 2016 to date, with net outflows of €1.7bn.

Social insurance providers invested €3.6bn in 2014 and a further €2bn last year, with total allocations reaching €1.3bn for the year-to-date. And while the German federal, Länder (state) and local governments are captured in the statistics, they barely register. The Länder rank highest of the three, with investments of €200m per annum over the last three years, including during the first six months of the current year. The level of commitment in 2016 is not shared by public and ecclesiastical supplementary pension funds, which have seen inflows of €400m over the first six months of 2016, despite investing €4bn each of the last two years.

Private organisations are proving interesting, investing €3.8bn and €3.3bn over the past two years, equivalent to 5% of total inflows. This group saw a further €5.9bn in net inflows during the first six months of 2016, aided, in part, by the reclassification of the organisations as discussed above, and they should account for 10% of new business during 2016 if inflows stay at current levels.  

Provider overview
Allianz’s asset management and associated groups remain the largest provider of Spezialfonds and other institutional services in Germany, with total assets of €583bn, of which €60bn is both managed and administered by the firm as part of traditional bundled Spezialfonds mandates and a further €190bn is administered. 

The Allianz group is also the portfolio manager of a further €166bn of assets which it does not administer, but the statistics are unable to capture where one part of the asset management group is responsible for administration and another for asset management – meaning the firm may have a higher overall share of bundled fund services. 

This may seem misleading given that the distribution of activities between different entities takes place for organisational reasons and investors interact with the firm at group level. Companies that only handle part of the Spezialfonds value chain may also have been spun off, meaning that internal and external entities may be indistinguishable to end investors. It seems right that if individual companies within a business are freely able to compete for awards with outside firms, with no distinction made between the two. It is therefore right that this fragmentation is captured.

The Spezialfonds data also includes a further €166bn in externally managed assets – a category where Allianz is well ahead of any other provider – which captures the management of securities and other assets not held within fund structures. Such assets may be held within securities depositaries, or free mandates. 

net inflows into spezialfonds by investor category

spezialfonds and mutual fund providers by assets under management

Ranking of providers
In previous years, we have focused on a ranking of providers by assets within Spezialfonds and free mandates as a whole. This year we have employed a different approach, it is nonetheless important to examine the ranking. 

The providers captured within the first nine positions have not changed over 2015. After Allianz, HSBC remains in second place with €204bn in assets, followed by Universal-Investment, Deutsche Asset & Wealth Management, Union Investment, Generali Investments, Helaba, Deka and Metzler. The tenth place is claimed by Bayern Invest, which at the end of 2015 claimed €64bn in assets, pushing AXA back one spot to eleventh with €59bn in assets. WestLB Mellon Asset Management KAG is now Oddo Meriten following its sale to Oddo & Cie in 2015. Invesco has risen by two places, and claims around €12bn in assets, as do Hansainvest and Amega.  

Volume of Spezialfonds assets
Figure 6 is arranged by total assets within Spezialfonds, regardless of whether the fund management companies are only responsible for portfolio management, administration, or both – but not assets held within free mandates. However, the graph does now capture mutual funds, as these now do also include significant allocations from institutions. While the hard limit of 10 institutions per Spezialfonds, introduced in 1990, no longer applies, there are still reasons for institutions to allocate to mutual funds.

Mutual funds permit the rapid deployment of assets across a range of asset classes and management styles and managers can be easily changed. Higher costs can be counteracted by negotiating rebates with large investment volumes, and administration costs are lower as accounting rules only require reporting of fund level assets, not individual holdings. 

The underlying assets within Spezialfonds (figure 7) have not changed over the period covered, with equities claiming 12.3% of assets at the end of June 2016, down from 12.7% in December 2014. The overall exposure to domestic, European and global equities ex-Europe also remains unchanged, while fixed income exposure fell from 59.6% to 57.8%. German fixed income was affected more, with the asset sub-sector falling from 9.3% to 8.1%, while fund exposure – including traditional funds and ETFs – has risen by two percentage points to 20.5%. 

Future of Spezialfonds
Any predictions about the future of Spezialfonds sector must take into account the uncertainty that results from new political ideas. For instance, the German asset management association, BVI, was able to deflect an unfavourable tax proposal. 

People despise uncertainty, and such uncertainty impacts capital markets – which is the reason so many are thinking of the UK’s Brexit vote. As long as this uncertainty prevails, decisions will be made which damage the UK economy. But that is not to say the country may not end up stronger on the other side of the debate. 

asset allocation of spezialfonds

Despite the uncertainty, London’s position as the premier European financial hub is unlikely to be undermined, it remains to be seen if asset managers and financial institutions build a presence in Frankfurt or Paris. Free movement, crucial for London’s continued existence as financial hub, should remain. Whether Brexit comes to fruition, whether sterling rises or falls, and whether all, some or none of the predictions come true, the Spezialfonds sector will hardly be affected. But as delightful as the sector’s current strength may be, it remains a uniquely German success story, with exclusively domestic providers and 99% domestic investors.

Luxembourg’s ongoing competition with Germany to be the predominant fund domicile will have a greater impact. Those active in Luxembourg were euphoric at the introduction of the new law for reserved alternative investment funds, regulating a type of alternative invest ment funds (AIF) product, a step that would not, strictly speaking, be necessary in light of the Alternative Investment Fund Management Directive. The product does have the advantage that in place of the tax transparency offered by the special limited partnership, it either levies a charge of 0.01% as with Luxemboug SIFs, or allows for the full application of double taxation agreements. 

Those able to launch funds quickly and commit capital the fastest are aided by the fact that compliance is entirely policed by the AIF in question, to be overseen by an auditor after the fact. Therefore, investors themselves under strict supervision may not be lured to the new Luxembourg product, and it remains to be seen how well the product can compete with German Spezialfonds.

Till Entzian’s annual review of the Spezialfonds market follows the tradition started by Dr Hans Karl Kandlbinder, the originator of the Spezialfonds concept. IPE has published an English language version of this report annually for many years. A German version of this article appears in the August 2016 edition of the Zeitschrift für das gesamte Kreditwesen, published by Fritz Knapp Verlag. Till Entzian is a lawyer based in Frankfurt and advises on Spezialfonds