Expected changes to capital gains tax will fuel a surge in funds sales but 2008 will not be a bumper year, say Hans-Jürgen Dannheisig and Clemens Schuerhoff

Net asset flows in Germany for June 2008 totalled about €28bn, far below levels in previous years (2007: €45.9bn, 2006: €44.5bn, 2005: €44.5bn). Only in 2004 were June sales lower, at €19.5bn.

The reasons for this sobering fact are various, with some working against others. Spezialfonds and money market funds found it particularly hard to match last year's volumes. On the other hand, the year-to-date figures for equity and fixed income funds are quite respectable. True, both asset classes have lost over €1bn this year. But redemptions in June 2007 came to €11.3bn for equity funds and €6.9bn for fixed income funds. This can certainly be explained by the harmonisation of capital gains tax (the introduction of a compensation tax on capital gains) in January 2009, which is driving mutual fund sales this year: any fund shares purchased in 2008 are not taxed at the new 25% flat rate. (See figures 1 and 2). 

Funds of funds and multi-asset vehicles take off

As expected, funds of funds and multi-asset products are leading mutual fund sales in Germany. Funds of funds gathered about €6.7bn, multi-asset vehicles just over €5.2bn. Open-ended property funds were in third place with €4.1bn, confirming their turnaround once and for all after a catastrophic 2006.

Luxembourg domicile of choice

Luxembourg-domiciled mutual funds saw €22.2bn of inflows in June 2008, while German mutual funds faced redemptions of €3.4bn. The contrast is less stark for funds of funds: German vehicles received €2.8bn, compared to €3.9bn for their Luxembourg equivalents. (See figure 3).

Growing number of funds

The number of mutual funds grew by about 1400 between January 2007 and June 2008. This trend was seen across every fund sector and shows that fund houses have been very active in launching new products. (See figure 4).

Funds of funds and multi-asset funds benefit most from the harmonisation of capital gains tax. This can be seen not only in the high sales figures for H1, but also in the corresponding rise in numbers. This tidal wave of new funds is to be greeted with scepticism, as the quality of a fund range is not determined by the number of vehicles available. In June 2008, there were 680 funds of funds and 895 multi-asset funds (mutual funds) in Germany. Both investors and sales teams have to see through this jungle. (See figures 5 and 6 )

Outlook unclear

Although a December rally before the changes in capital gains tax is to be expected, 2008 will not go down as a bumper year. There are no signs of a broad investment or fund culture emerging in Germany. How could there be, when the government has introduced capital gains tax on all assets? We can assume the tax regime will have a negative impact on the fund business - although a flat-rate tax of 25% actually benefits many investors, compared to the current complex rules surrounding income tax declarations. But people have to realise this first.

Independently of the tax changes, meanwhile, the asset base of the total market has been shrinking in line with markets and redemptions for several quarters. If it were GDP, there would be talk of recession.   

Clemens Schuerhoff and Hans-Jürgen Dannheisig are managing partners at Kommalpha Institutional Consulting

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