Head-to-head

With the launch of its new Master KAG offering, JPMorgan is looking to steal a march on those other global custody players – such as Citigroup and State Street – currently active in the German market offering custody services via the traditional depotbank route (the latter having entered substantially augmented this segment following its acquisition of Deutsche Bank’s depotbank business). The move presages the imminent introduction of a new Investment Act, which will see formally incorporated onto the statute books a December 2001 decree – issued by regulator BaFin – liberalising the law in respect of outsourcing elements of the portfolio management function.
At this point in time, there are some 80 Kapitalanlagegesellschaften (KAGs) – the management companies that provide both investment management services and administration services for Publikumsfunds and Institutional Spezialfonds – operating in Germany. Allianz Dresdner’s dbi KAG is still the largest player, with regards to ithe institutional business, followed by Deka, Deutsche Bank’s Deutsche Asset Management and Activest KAG, the investment management arm of HVB Group.
In the past, institutional investors that wanted to appoint a range of asset managers to collectively manage their portfolio has had to appoint individual KAGs, each of whom would provide the related underlying services – this obviously engendered a great deal of complexity and inefficiency, with the institutional investor receiving different reports and having to deal with different technology platforms in respect of each KAG, making it difficult to get a consolidated overview of their portfolio.
In contrast, the Master KAG concept allows for the use of a single KAG responsible for appointing the underlying asset managers at the institutional investors behest, with knock-on benefits in terms of transparency and consolidated compliance and valuation reporting. The deployment of a uniform platform means this ‘multi adviser fund’ structure allows disparate information flows from the different managers to be collated in order to provide the investor with detailed risk, cost and performance analysis.
“Launched on October 1, under the name JPMorgan Fonds Services and headed up by Martina Reichl, the bank’s Master KAG will be one of just three ‘neutral’ platforms in the market, ”says Arnulf Manhold, business executive, Investor Services and board member of JPMorgan AG – that is, a purely administrative service that will operate wholly independently of the bank’s asset management activities, now reorganised within a newly formed subsidiary, JPMorgan Fleming Asset Management (Europe) Frankfurt branch. This puts the US bank head-to-head with the other independent Master KAG offerings from Universal, the investment management subsidiary of several German private banks, and BHW Invest, a subsidiary of the eponymous building loan provider.
Although Universal currently dominates the sector, holding some E27bn in assets, giving it a 31% share of the E87bn Master KAG market, Manhold is confident that there remains plenty of scope for new entrants. “We expect this market to grow another E13bn to E100bn by the end of the year,” he says. “Mounting cost pressures mean that KAGs are really beginning to question whether they want to perform anything other than the core investment management functions.”
“With our new offering we are refining the Master KAG concept and moving it far more towards full outsourcing, which is very attractive to those KAGs that find themselves facing a tough future, perhaps even closure. We feel comfortable working on full delegation models, whereas other providers here in Germany are hesitating to make that leap and most arrangements are still implemented on an ‘advisory’ basis.”
The advisory approach sees the asset manager sending trades to the relevant KAG for approval prior to execution under the ‘pre-approval’, or ‘echo’, process; settlement of those trades can only take place once that approval has communicated back to the manager. “This is cumbersome and the asset mangers do not like it so much,” says Manhold. “What we are proposing is much more streamlined – at the same time as the investment manager advises the KAG of the trades, he also sends them to us in our capacity as depotbank, and we pass those trades straight to the market for settlement.” “UsersClients are also encouraged to use SWIFT”, he adds, thus enhancing automation and so reducing the errors that invariably accompany the manual reinputting of data.
In addition to the Master KAG, JPMorgan is also offering a ‘Rent-a-KAG’ option. “Non-indigenous KAG owners are more and more frequently coming to the conclusion that they would rather not have to support the capital base, staff and systems that are required when entering the German market,” says Manhold. “While they need a KAG if they are to win asset management mandates here, they don’t necessarily need their own. Accordingly, the owner investor can appoint us to do the administration and we then delegate back to the investment company – in effect renting the KAG from us.” Alternatively, the KAG can opt for a more traditional outsourcing approach, where it continues to handle the investment management functions but outsources merely the administration component,” he adds.
timjsteele@btinternet.com