Assets invested in Spezialfonds, extensively used by German institutional investors, amounted to DM919bn (e470bn) at the end of last year, according to the Frankfurt-based BVI, Germany’s investment funds trade body. At the end of 1995 these assets were DM305bn.
“Spezialfonds’ spectacular growth continues,” comments consultant Greenwich Associates in its latest study of the German institutional market. In particular, this looked at the non-captive Spezialfond market, comprising some 65% of the market, where the owners are independent of the KAG bank providing the investment management. Greenwich reckons that these non-captive assets total some E305bn, with the 90 largest sponsors investing E183bn in 540 funds. The 140 medium-sized sponsors had a further E57bn in 560 funds, while 1,000 of the smallest investors participated in over 1,700 funds with assets of E65bn. The survey covers around three quarters of these ‘non-captives’.
The captive market consists of around 180 funds, with assets of just over E81bn, in sponsor-owned KAGs, with another 1,300 funds of savings and co-operative banks that manage their funds with the KAGs of their parent banks, which by Greenwich estimates, account for E85bn.
This latest study confirms the drift away from fixed income investment, but is not just being replaced by domestic equities. In fact, the proportion of domestic shares is in decline, down from 38% in 1998 to 31% of equity portfolios in Spezialfonds, as sponsors respond to the reality of the euro and move into non-European equities. “Our expectation for next year is a continuation of these trends,” says Greenwich’s Bernd Perl, who ran the study. So the strongest shift in asset allocation is expected to be into non-domestic European equities, with the greatest number of investors intending to make such moves over the next two years; the next strongest trend is to non-domestic European bonds, with strong support for both North American and other international equities. But other new investment areas showing up on the survey’s radar are private equity, emerging markets and international bonds.
The extent of passive management in Germany is widely discussed and it is good to see some firm evidence emerging. According to the study corporate pension funds and the savings banks have 7% of assets indexed and this is expected to grow to 10% by 2002. But the surprise finding, perhaps, is that the insurance companies appear well ahead of the pack with 12% of assets given the passive treatment, a proportion that is expected to hit 16% in two years’ time.
The hold of an absolute return approach seems to have almost disappeared according to the survey, as only 5% of institutions now use this, compared with 73% opting for an index benchmark and around 14% operating a peer group benchmark with only 2% favouring a median. The index benchmark has it lowest support among corporate pension funds with just two thirds taking this route and nearly a fifth using the peer group benchmark.
The greater move to wider investment is reflected in the increasing numbers of investment managers used. This has risen from 5.1 to 5.5 managers on average, with the highest number (5.8) recorded by public pension funds and 5.6 by corporate pension funds. The laggards are the savings banks, with an average manager count of 3.5, but they seem keen to redress the balance as 50% of these banks expect to hire external managers in the future, as do 44% of insurance companies. The pension funds do not seem to be so active in searches with just 26% of corporates and 31% of public funds likely to seek managers.
Perl expects a “relatively strong shift” to external management through Spezialfonds across all investors classes other than insurance companies, with savings banks in particular being an important growth area for Spezialfonds. He adds: “Institutional asset management outside Spezialfonds has the largest potential with public/ industry fund sponsors and savings banks.”
Greenwich has no doubts of the way in to the German market in view of the “open-door” policy observed for solicitations by 80% of sponsors.
“Personal visits by a marketing professional or the investment manager, and not the bank, remain the preferred and most effective solicitation method,” says Perl.
Consultants are making their appearance and are used by a fifth of the medium to large sponsors for manager selections. But corporate pension funds trail their public pension fund cousins by a long way, with only 10% opting for consultants, compared with nearly a third of public funds. Insurance companies’ use of consultants is at a surprising 27%.
It looks as if investment management fees are on the increase. The overall investment fee level for this year is 19.4 basis points, up from 15.1 two years ago. Fee levels for balanced Spezialfonds have moved to 17.8bps from 14.1bps in the period, with domestic equity funds coming in at 21.8bps, European 22.8bps and international 27.3bps.

Topics