DWS secures roots beyond Deutsche Bank

The history of DWS dates back to 1956, but recent political pressures have led to friction between the German funds powerhouse and its even more high-profile parent, Deutsche Bank. While the two institutions are based in the same Frankfurt thoroughfare, the bank remains in the prime down-town location, while its offspring has been shipped out to an “up and coming district” on the scruffier fringes of the city.

Publicly, at least, there remains a show of affection between the two close relatives. But signs of disquiet have increasingly been bubbling below, and now just above the surface. The big area of dispute has been the lucrative fund sales arena, following Deutsche Bank’s successful introduction of a limited open architecture system.

Best-selling rate

After Deutsche Bank began to sell the funds of Invesco and Fidelity in 2002, Axel Benkner, chief executive of DWS, dramatically claimed to PWM that his funds were no longer being sold through Deutsche Bank branches, and that 100 per cent of new business was coming from other channels such as IFAs. Rivals, Mr Benkner said, had “gained a position in Deutsche’s client base”.

‘We target growth wherever we can ... In the long term, we want to increase market share outside and inside Germany’

Axel Benkner, DWS

However, Mr Benkner seems happier after DWS was added at the 11th hour to a list of eight strategic partners, or preferred providers of funds, drawn up in April 2003. Now he says DWS funds are best-sellers through Deutsche Bank branches because clients and bank staff prefer them. “Our performance has been much better than that of our competitors,” Mr Benkner told PWM after a gathering of DWS management in his high-tech headquarters on Frankfurt’s Mainzer Landstrasse.

“The Deutsche branch network wanted to sell our funds rather than those selected from external partners. Our concerns are still there for the time being, but with our performance track record, the effect is not as big as I anticipated.

“DWS has the best-selling funds of any of Deutsche Bank’s strategic partners. This will continue as long as our performance is better.” The lion’s share of the E957m garnered last year for the DWS dividend income fund came through the door of bank branches.

Further inflows

Now, with Deutsche Bank beginning to roll out its strategic partnerships for fund sales through several other European countries, DWS hopes to see further inflows. While Mr Benkner clearly likes to play down the DWS reliance on Deutsche’s sales channel, there appears more than a little coincidence in that he expects the fastest growth in Spain and Italy – the very countries where the bank has the strongest branch network.

“The rolling out of Deutsche Bank’s third party distribution strategy will not help our fund sales, but our performance and our own sales channels in these countries will ,”

says Mr Benkner. “We target growth wherever we can find that. In the long term, we want to increase market share outside and inside Germany.”

The long-term goal according to Mr Benkner’s right-hand man and chief of European distribution, Axel Schwarzer, is to be number one not just in Germany, but across Europe. While 35 per cent of sales currently come through Deutsche branches, there is an increased focus everywhere on becoming the third party provider of choice.

“I wouldn’t like to say that Deutsche Bank is becoming less important for us, but we need to balance our inflows,” says Mr Schwarzer diplomatically. “Deutsche Bank is an important channel, but we need diversification of distribution.

Local competition

“In 2002, UBS was in front of us in European retail asset management, but in 2003, we passed UBS,” says Mr Schwarzer proudly. DWS now runs over E120bn across Europe.

“We don’t want to compete with other foreign asset managers across Europe, but with local houses such as UBS, Credit Suisse and Julius Baer in Switzerland, and with BBVA and SCH in Spain. Our fight is not just with Fidelity and JP Morgan,” adds Mr Schwarzer. “The local battle is the big one.”

‘I wouldn’t like to say that Deutsche Bank is becoming less important for us, but we need to balance our inflows’

Axel Schwarzer, DWS

The challenge is to penetrate those banks who currently sell internally managed products in Italy, Switzerland and Spain, but through providing a full range of products rather than just purely core European equity funds.

“Our strategic position is that we want to be a fully fledged provider of all asset classes, not just a small base of blockbuster products,” says Mr Schwarzer. This means offering a range of money market, balanced, equity, bonds and structured products.

DWS hopes to be perceived as among the top six players in each European country, through a local offering of 40-60 products, says Mr Schwarzer. In the UK, this means a separate range of open-ended investment companies (Oeics) sold through independent advisers, instead of the Luxembourg funds sold in Europe.

The UK funds are managed by institutional asset managers in London, rather than the separate Euro-friendly Frankfurt team. DWS UK funds enjoyed E200m net inflows in 2003.

“It is very hard to sell international products in the UK, but we will work on bringing a continental flavour, with innovation from Europe,” says Mr Schwarzer.

He expects the current UK distribution model of independent advisers and insurance companies to become more similar to the Continental bank-led model once depolarisation regulations kick in during 2005. “The IFA market will not fall by the wayside, but it will no longer dominate. That’s not such a bad thing, it will fit more with our international strategy and we will be able to capitalise on this.”

Registration problems

Of the E3.7bn in net inflows during 2003, 35 per cent came from outside Germany. This compares favourably with 2002, when just 10 per cent of E2.1bn inflows came from foreign markets. The one key obstacle hindering the multi-channel model which DWS espouses is a regulatory one. Keen as DWS was to replicate the success of the dividend income equity fund outside Germany, registration problems were soon encountered.

“We wanted to do this for Europe in 2004, but the markets were down,” laments Mr Schwarzer. “Registering funds in Germany was quick when we saw the potential, but takes three months across Europe, and we can’t do it quickly enough to benefit from the market. It’s not easy to access 10 markets when you need to register funds.”

Strategic dealings

Deutsche Bank’s overall open architecture strategy began in 2001, when a partnership with Invesco was first agreed.

A deal with eight strategic partners followed in 2003. The external providers chosen were Alliance Capital, Fidelity, Franklin Templeton, Invesco, Merrill Lynch, Morgan Stanley, Schroders and UBS. Bank insiders claim there was never any doubt that DWS funds would be included.

Deutsche strategists, who say that sales of funds to private and business clients in Germany exceeded all expectations, always intended the campaign to be a global one. Hence the roll-out of advertising and fund sales through branches in Belgium, Italy and Spain during 2004. However, the eight “strategic partnerships” are not the only agreements in place and “there is always a chance to buy funds if somebody asks for them”. But qualified advice can be given only on funds of the partner groups.

While the bank denies that any one group’s funds are chosen due to prefer- ential incentives, DWS funds currently outsell all competitors. “As long as DWS remains the best fund company and the market leader in Germany, it will reflect in our sales figures,” said a Deutsche Bank spokesman.

However, the bank believes distributors have gained the upper hand over asset managers, which may explain some of the recent friction with DWS. The bank admits this trend can be reflected in contract negotiations. It does not dispute Mr Benkner’s claim of depressed sales after the Invesco deal, but points to today’s healthy sales of DWS products, plus 10 consecutive annual S&P fund awards.