Managers making their mark

To get an idea why the US investment bank Goldman Sachs is widely respected, consider what it has achieved in Germany since arriving there 15 years ago.
Goldman Sachs, which runs a smallish operation in a skyscraper next to Frankfurt’s trade fair, has for years consistently been at the top of the league tables in investment banking services, including mergers and acquisitions as well as equity and debt issuances.
The bank’s asset management arm, Goldman Sachs Asset Management (GSAM), has also emerged as one of the biggest foreign players in the German institutional market, with $11bn (€8.9bn) in assets under management (AUM).
In fact, thanks to $4bn in new money last year, GSAM has surpassed JP Morgan, a comparable US rival whose AUM at last count totalled €8.7bn. The race is still very close, however.
That Goldman Sachs would become one of Germany’s leading investment banks is not surprising.
It has been a specialist in this area for decades and had the jump on big domestic banks like Deutsche Bank and Dresdner Bank, which really only began competing in investment banking in the early 1990s.
But why is GSAM doing so well in a market that is overrun by big German banks and insurers as well as a host of foreign players eager to poach as many institutional clients as they can?
Part of the answer is GSAM’s global tactical asset allocation (GTAA) product; while the product class is also offered by other asset managers, it has been marketed most successfully by the US house.
GTAA seeks to enhance investor returns by taking a series of relative bets in global equity, fixed income and currency markets and engaging in asset class timing and US equity size timing.
According to James Dilworth, head of GSAM in Frankfurt, GTAA has done particularly well with German pension funds which, in order to meet their liabilities comfortably, have a pressing need for more return than what they can currently expect from stocks and bonds.
Another attraction, Dilworth says, is that the pension funds get the extra return for relatively small sums of investment. “Suppose a pension fund client with €1bn in assets wants to implement a GTAA overlay with a 4% tracking error on that portfolio. To do so, it needs to invest only 10% of its total volume into the GTAA fund to get the exposure on its entire portfolio, so it’s very capital efficient,” Dilworth explains.
GTAA is not the only reason why GSAM has been winning mandates from German pension funds, which account for slightly more than half GSAM’s assets. Another crucial reason has been its pension advising unit that was set up in 2000 and is headed by Dirk Popielas. The unit provides services which traditionally have been handled by an investment consultant, namely asset liability studies and advice on portfolio construction.
In offering pensions advising, GSAM joins other well-known institutional fund houses, including Allianz Global Investors, Deutsche Asset Management and Metzler Asset Management.
The trend has been sharply criticised by some investment consultants, who say that their business with smaller and, hence more thrifty pension funds, is being undermined. Yet the GSAM German chief dismisses such talk.
“About 80% of the pension fund clients we’ve talked to prefer to go with an independent consultant, so I don’t see how we are a threat,” he says.
Dilworth adds that, on the contrary, the market for investment consultants in Germany is very promising as they, along with GSAM, “are preaching the same message to pension funds and insurers”.
That message, according to him, is that these clients still rely too heavily on traditional asset classes like European equities and bonds which give them at best single-digit market returns or what he calls “beta”. To improve their returns, or get more “alpha”, Dilworth suggests that these clients should diversify more into other non-traditional asset classes and think more globally.

In helping clients achieve these aims, Dilworth says that beyond GTAA, GSAM has had success with its quantitative equity products and spread products like high-yield and emerging market bond funds. “This shows that we’re not building our business just around GTAA.” Yet Dilworth would not be drawn on how GSAM’s German business will continue to develop, saying that its projections were for internal use only.

Regarding the prospects for the German pensions industry, Dilworth has mixed feelings. One the one hand, he feels that growth will come both from the pension funds’ need to diversify their investments and the trend among German companies to create external funds (or so-called contractual trust agreements) to finance their liabilities.

But Dilworth doesn’t expect there will be any real boom in private pensions. He argues that the tax incentives for retirement saving at the corporate or private level are simply not significant enough. Those incentives were contained in the government’s socalled Riester pension reforms of 2002, which are aimed at boosting second and third-pillar pensions.

He says: “In Germany, for example, you can’t take €10,000 and invest it in a pre-approved plan and then get the tax credit back at the end of the year like you can in the UK or the US. Until something like that is possible, measures like Riester will be nothing more than band-aid on a big wound.”