GERMANY - A boom in so-called “master funds” should enable Germany’s Metzler Asset Management to grow its institutional assets under management in 2005 about as fast as they did in 2004, one of its executives says.

In a master fund, back-office administration of a client’s institutional funds are centralised within one provider, reducing costs while boosting efficiency.

It was largely due to this product that Metzler’s institutional AUM jumped almost one-third to €14.5bn in 2004. Of that sum, €8bn was managed by master funds.

Metzler’s master funds continue to be in great demand this year. According to Christian Remke, board member of Metzler AM, Metzler has just won a mandate from German insurer VHV to create a master fund for €2bn in VHV assets.

“Our master fund business is booming. The VHV mandate enabled us to surpass the €10bn mark in this business and I think that overall, we’re on track to have the same double-digit growth as last year,” said Remke, who was interviewed by IPE in Frankfurt.

This growth may sound impressive, but the margins in Germany’s master fund business are not. According to experts, the margins do not exceed 10 basis points, meaning that master fund providers must accumulate high volumes in order for the business to be viable. Helaba Invest, another master fund provider, puts the threshold for the product’s viability at €10bn.

“We’re aware of the dumping prices being offered in the master fund business, but we will have no part of that,” said Remke. He added that unlike some German providers, Metzler did not insist on doing part of the asset management for a client wanting a master fund.

According to Remke, other sources of growth for Metzler’s institutional business are contractual trust agreements (CTAs), working time accounts and straight occupational pensions management.

He said that since Metzler began actively marketing these services to German small and midsize enterprises (SMEs) in September 2003, the asset manager had won 140 clients from the sector.

Under the CTA, Metzler removes a company’s pension liabilities from its balance sheet and consolidates them in a fund. Metzler also secures the fund against insolvency and conducts an asset-liability study on the company’s behalf.

A committee consisting of the company’s top finance and personnel officers is then formed to agree the investment strategy for the fund. Beyond Metzler, asset managers like UBS and Crédit Suisse regard CTAs as a key source of profit in the German occupational pensions industry.

Regarding pure asset management, Remke said Metzler had positioned itself in the German institutional market as a specialist for European equity and bond mandates.

To expand its brief, Metzler formed a partnership with Russell Investment Group in May 2003 in the areas of hedge funds and multi-manager funds. Under the partnership, Metzler has been selling the Russell-managed funds to German institutional clients since 2004.

Remke declined to disclose how much in volume the products had generated in Germany so far. But he said that, following a good reception for the initial fund-of-hedge fund, a second would be rolled out this year.

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