The low interest rate environment has injected the German Spezialfonds market with new life, according to the latest research from rating agency Telos. 

Last year the assets managed by these vehicles – which specialise in catering for institutional clients – reached €1.6trn, compared to €1.48trn in the previous year, and increase of 8.1%.

Overall assets in this market segment have doubled since 2010, Telos said. Over the last 10 years the Spezialfonds market grew by 130%, while the retail fund sector only managed an increase of 40%.  

Pension fund and other retirement providers increased their share of assets in the Spezialfonds market by 20% year-on-year and accounted for around one quarter of the volume at the end of 2017.

“The continued low interest rate has made a not insignificant contribution to the growth in this market,” the researchers noted. “It has forced institutional investors to greater diversification and also a specialisation across various asset classes.”

In addition, Telos found that Master-KVG structures were also growing, as pooling of funds in a single structure become more popular among institutional investors – primarily to to unify reporting and simplify portfolio structures.

Telos said: “The Master-KVG helps foreign asset managers place their products in the German market and increases the attractiveness to offer specialised investment approaches and fund solutions to investors.”

Currently two-thirds of all Spezialfonds are managed in a Master-KVG structure. Telos predicted re-investing maturing bond mandates would further fuel this trend as investors switched to niche fixed income segments.

“Asset managers with specialised approaches can offer their products in segments like high yield, loans or municipals, under one master fund roof,” the researchers said.

Asset class split

Telos noted a doubling of investments in private equity year-on-year to 1.6% of overall industry assets, as well as an increase in real estate exposure from 8% to 12%.

The researchers also highlighted a heightened interest among investors in private debt and senior loans, although total exposure was still very low.

At the same time, the share of government bonds dropped significantly from 43% to 30%.

For the next two years investors will be looking to allocate more to real estate and convertibles, the Telos survey showed.

Interest in alternatives including infrastructure was constant but “remains limited” given certain regulatory restraints, the rating agency added. Meanwhile, because of “volatility and political instabilities”, German investors had almost completely lost faith in commodities and foreign exchange investments.

The full study (in German) can be found here.

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