GERMANY – Due partly to proliferation of big corporate pension funds, Swiss bank UBS has raised its institutional assets under management in Germany to €8bn – more than double the figure for December 2004.
The increase makes UBS one of the biggest foreign asset managers in the German institutional market, alongside Goldman Sachs and State Street. Meanwhile, UBS rival Credit Suisse has seen its institutional AUM in Germany rise to €4.9bn now from €4.2bn in November 2004.
According to UBS, “a significant portion” of the €8bn it runs in Germany comes from pension funds, including Versorgungswerke (funds for professional trades), Pensionskassen (traditional corporate pension vehicles) and newer corporate pension funds called contractual trust arrangements (CTAs).
Tim Blackwell, managing director of UBS Global Asset Management in Germany, said that while all these clients had awarded it with mandates, “within our pension business, the strongest growth trend is seen within the context of CTAs”.
Recently, more than a dozen listed German multi-nationals and several mid-cap firms have created CTAs to fund pension liabilities instead of doing so via cash flow. The boom has led Deutsche Asset Management to estimate that Germany’s CTA market will total at least €15bn in 2006.
“I think that figure reflects a broader consensus on the growth dynamics of CTAs, though it is very likely that some of that volume spills over to 2007," Blackwell told IPE in an interview at UBS in Frankfurt.
“In any case, the dynamic growth we are seeing with CTAs should last another 12-24 months, also because there is potential for CTA vehicles among listed companies outside of the Dax. I think after that, though, the growth will taper off,” he said.
Regarding its German product range, Blackwell said UBS was primarily winning mandates in the realm of equities, whether European, global or US. “But we have also won a number of fixed income mandates with a specific focus on emerging market debt or corporate bonds,” he added.
Hedge funds, on the other hand, have not been a performer. Since launching a German fund-of-hedge fund for private clients in early 2005, UBS has taken in just €6m with it. Overall, the more than two-year-old market for Germany-domiciled hedge funds has a volume of around €2bn.
Blackwell, however, said he remained convinced that hedge funds had great “long-term” potential in Germany. Indeed, since early May, equity markets have plummeted while market volatility has grown – ideal conditions for hedge funds.
Asked about the impact of investment consultants in Germany, Blackwell said he agreed with estimates that 20-30% of institutional money was now allocated through them. “We actually saw that figure rise to 40% to last year. However, I don't think the figure will rise any further than that in the short to medium term so that, for example, a consultant driven market would emerge as in the UK or US,” he added.
Finally, Blackwell echoed the sentiment of many in Germany's institutional market who say that regulation is still a problem. “What I mean by this is that investment restrictions and stress tests can engender pro-cyclical behaviour among investors. The industry needs to have a ongoing dialogue with the regulator on how this behaviour can be diminished,” he said.
In Germany, pension funds that are not CTAs face stress tests of their equity, fixed income and real estate portfolios. They also face certain investment restrictions, including, for example, a 35% cap on equity investment and a 5% cap on hedge fund investment.