A clear trend emerges from the research by SüdProjekt that directly held portfolios as used in Anglo Saxon markets by investors will become more frequent in 2005 in Germany.
Just over half of investors surveyed covering 45 institutions with assets over E700bn, will allocate more assets here, almost 30% significantly and 23% somewhat. The banks and insurers plan a clear increase in direct portfolios, while non-financials, which include corporates and pension funds, are more cautious, focused as they are on retail funds. Almost half the banks, 47%, will significantly increase their direct portfolio in 2005 and 20% somewhat. With insurers the figures are 23% significantly and 46% somewhat. That is by a wide margin more than the plans for retail funds.
Larger investors plan a major extension of their directly held portfolios. Half of all larger investors will increase their direct holdings significantly in 2005, 33% somewhat. Not a single one plans a reduction. This makes the large investors the main movers by a wide margin. The mid-sized investors will increase more moderately (8% significantly, 38% somewhat), but like the larger institutions none will reduce. The smaller investors are less heterogeneous.
Among the reasons for this move are the very low costs achieved by abandoning the Spezialfonds wrapper, and the transparency of a direct portfolio. They are the main reasons for moving (back) to a Anglo-Saxon way of holding assets direct with a custody bank. Around three quarters of respondents moving to a direct portfolio gave these as reasons for the planned increase. This is also in line with the evidence of possible improvements in the retail funds’ offering. ‘Fees at Spezialfonds level’ and “clearer investment policy” were two factors which could make retail funds more attractive. Even for the banks, the treatment of funds, particularly Spezialfonds, under Basel II is not an overriding theme. Overall only 13% give it as a reason for the direct portfolio increase. Among the 42% “other reasons” may well be the loss by Spezialfonds of accounting benefits – under IAS they can no longer accumulate hidden reserves.
Keeping down costs is the main theme for non-financials and insurers, while accounting transparency is key for banks. 100% of insurers and 80% of non-financials see the low costs of direct holdings as a big plus point, but only 50% of banks agree. The banks we asked put 1:1 transparency at the top of their list (70%) and the acceptable performance outlook (60%) also ahead of costs.
German institutions show a clear investment interest in retail funds. Over 50% of those asked said that they plan an increase in their holdings of retail funds for 2005, half of them a significant increase.
The demand comes above all from the non-financials. 33% of the non-financials we asked plan a significant increase in their assets held in retail funds and 27% at least some increase. It is also interesting that none plans a reduction.
Those that are increasing are primarily corporates (60% significantly, 20% somewhat), rather than pension funds (25% significantly, 38% somewhat), or churches and charities, which will not increase their retail funds assets in 2005. 33% of banks plan to increase their retail funds volume significantly, with a further 20% increasing somewhat. On the other hand some banks will clearly reduce their holdings: 13% of those we asked even want to reduce their positions in 2005 completely, with 7% registering a significant reduction.
The insurers have more moderate plans. None of our participants will increase retail funds significantly, 33% somewhat. On the other hand only 8% of insurers want to reduce their retail funds significantly.
The two-thirds of institutions who are building up their retail fund holdings in 2005 named better risk diversification as the main motive. Notably, half now find the fee structure available through institutional share classes and fee retrocessions acceptable. Themes like ‘late trading’ and ‘market timing’ which affected the market in 2004 have not shaken the trust of institutions in this product. The positive developments, from an investor’s perspective, on both these points are accordingly no reason in themselves to increase retail fund holdings.
The prospect of improved risk diversification is disproportionately important to the banks. The insurers, who will anyway be relatively less active in building up retail fund volumes in 2005, also show below average interest in the individual reasons we suggested in our questionnaire for doing so. Their main motive is the ease with which portfolio managers can be changed. By contrast, the non-financials named a wide range of motives for buying retail funds in 2005.
q Südprojekt surveyed 45 institutional investors with combined investible assets of more than E700bn during November and December 2004. In this study, we split the participants into nine sub-groups of investors. Altogether there were 15 banks, 13 insurers and 17 non financials which are other investors (industrial companies, pension funds, charities and churches.
Fergus Dunlop is managing director, SüdProjekt, based in Munich fergus.dunlop@suedprojekt.com

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