Spezialfonds, the main investment funds used by German institutional investors, have just survived a crucial period in their development in recent months.
These funds first appeared under the name of ‘Individualfonds’ some 30 years ago and for the first few years, from 1968 to 1971, were ridiculed by traditional bankers. But this form of investment vehicle met a real demand and grew quickly.
By 1975, when the German law regulating the investments of insurance companies and Pensionskassen was significantly liberalised for the first time, Spezialfonds had made the breakthrough and accounted for 20% of all fund investment in Germany. By that time, too, at the initiative of the authorities, their name was changed to Spezialfonds. This was done to prevent any ideas of the funds being branded ‘millionaires’ funds’ since at no time were private individuals able to invest in them – only institutional investors were allowed to. Indeed, for fiscal reasons, non-German institutional investors were excluded until 1990.
From Tables 1 and 2, the story of Spezialfonds continuing success can be followed, as one record-breaking years of sales following a number, with 1998 turning out to be particularly successful. Last year over DM130bn of new money went into Spezialfonds, when not only securities-invested funds boomed, but also real estate funds entered a promising upswing, with a total of 21 Spezialfonds now in this area, with assets of almost DM6bn.
At around DM11bn per month, almost 80% of the money going into investment funds in Germany took the Spezialfonds route in 1998. The number of these funds at year-end came to 4,245, compared with the 788 investment funds used by the non-institutional/retail market. The number of new Spezialfonds established amounted to 737, equal to 2.8 funds per working day. But in the first three months of this year, 147 funds were set up at a slightly more moderate rate of 2.4 new funds per working day.
So it was in this climate of boom that the new government dropped the bombshell late last autumn that funds would have a capital gains tax levied directly within the funds. To be fair, it must be pointed out that the previous coalition government had tried to introduce such a tax on funds assets three time, and all in vain. First in 1994, and then later with a plan, even supported by the conservative Bavarian government, and finally in 1998, with the 1999 tax reform law proposals.
This initiative by the new government was all the more surprising, as these former plans, all similar to last autumn’s proposed reform, had been defeated with the help and had relied on the majority the Social Democratic Party had in the Bundesrat, the second chamber.
To cut a long story short, intense pressure from experts in the field, the Banking Supervisory Authority and the Bundesbank had the result that the projected capital gains tax on funds was not put into effect, although other forms of torture were implemented, such as a capital yield tax, which does not hurt as much, for the following reasons:
q charities and other tax-free German institutional investors do not pay the capital yield tax at all or can recover at least half of it, as in the case of Pensionskassen.
q for foreign owners of Spezialfonds, the capital yield tax on dividends of German companies is not fully applicable, due to double taxation agreements.
So the boom in Spezialfonds in Germany looks like continuing unhampered. Elsewhere, however the stupidity of such capital gains taxes is being implemented, as in Austria, which intends to impose a tax of 25% on 20% of the capital gains realised within the Spezialfonds there.
Table 3 and Chart 1 give the latest available information as to the investment policy of funds. Of note is the high proportion now in equities, at nearly 40% (39.6%), and the comparatively high proportion in non- domestic assets at 36% (35.9%). At the end of 1998, there were 52 KAGs, involved in the market, offering a total of 4,224 Wertpapier-Spezialfonds.
This is based on a talk to the sixth Annual Institutional Asset Management Conference in Frankfurt.
Hans Karl Kandlbinder is an investment consultant based in Grafing bei Munich