‘Fad’ funds could distract investors

Rudolf Siebel, managing director of the BVI, the association representing Germany’s mutual fund providers, presented a positive picture for the fund management industry. But he laid down a pre-condition that the regulatory framework can be strengthened and developed rapidly enough. He also asked whether the proliferation of innovative products, also pointed out by Sal. Oppenheim’s Dr Hengster, might dilute the industry and distract investors. According to the BVI, 2005 was one of the best years in the German investment industry’s 50-year history. Assets under management grew steadily, reaching a record ?1,200bn at the end of 2005, up 16 per cent from the previous year and double the 1998 level. The institutional side has enjoyed average growth of 15 per year during the last 10 years. “We are a growth industry”, said Mr Siebel. However, there might be “too many” products on the markets for them to be successful. Mr Siebel spoke of “fads” such as “Internet, BRIC, commodities, and exchange rates”. In retail distribution, equity funds remain, in absolute terms, the dominant fund type in Germany. Although the trend is definitely towards a more balanced asset allocation, with shifts to both money market and longer term diversified pension vehicles, the increasing size of the market means the absolute value of equity funds still increased from ?142.2bn to ?179.7bn in 2005. According to Mr Siebel, investment in equity funds should receive particular attention. Investors and advisers have learned the important lessons from the 1999-2000 “equity hysteria”. However, with the need of guaranteeing pensions for Germany’s ageing population, he warned that it is not possible to do without equity funds at all. Shares must be positioned by the industry as a long-term investment strategy. But a pension planning model should be developed for a broad customer base. And some companies have already developed innovative ideas, such as the target savings funds known as ‘Zielsparfonds’, said Mr Siebel. After the recent appeal by the president of the Federal Republic of Germany, Horst Köehler, for an increased participation of employees in their company’s equity, the way forward is opening new distribution channels for equity funds in the corporate environment, as Germany does not have many listed companies. Other avenues for development in equity funds are long-term savings products, such as Riester savings (government supported pensions savings schemes) or fund-linked life insurance products, but also normal savings plans. The latter area is growing continuously. It appears that new investor in equity is long-term oriented and no longer the ‘speculator-type’. Pension funds were the “hit of the year”, be it total return products or products using hedging techniques, said Mr Siebel. However, uncertainty regarding the developments in US interest rates tones down perspectives for 2006. There is also strong demand in capital guaranteed funds. The German supervisory agency BaFin allowed guaranteed funds in 2005 as well as structured pension fund products based on the current derivatives regulation. Asset-backed securities and corporate bonds have also received increased interest in Germany. Currency overlay is on its way to recognition as a distinct asset class. Money market funds are back, said Mr Siebel. But innovation in this area is lagging behind in Germany. Hedge funds represent only ?1.3bn assets under management, but they are bearing up in a difficult regulatory environment. In 2005, they received ?57m in inflows. Two main challenges for hedge funds come from tax reporting and competition from structured products or Zertifikate. As for private equity, it is clearly a “blind spot” in the product provision armoury of the German investment industry, said Mr Siebel. Current discussions in the context of the revision of the 2004 Investmentgesetz (German regulation of the investment fund industry) to allow “other funds” gives hope for this kind of product to emerge. Mr Siebel pointed to the recent development of new products in the context of a rising number of public-private partnerships in infrastructure projects. Overall, 2005 has been “a peak year”, for the German funds industry, concluded Mr Siebel. However, some markets still need to mature – be it the two-year old hedge fund market or the third-party distribution market. Another key challenge ahead for Germany’s fund industry in 2006 will be providing a legal and regulatory framework which will allow growth to be sustained. Mr Siebel highlighted the following areas of work: renewal of the 2004 Investmentgesetz, MiFID, Ucits III and the need for the German legislator and regulator to continue thinking in competitive terms for Germany (Standort-Orientierung). BaFin has begun to deliver swifter decision-making procedures and timeframes for product accreditation, but there is still some way to go.

ID

Siebel: investment in equity funds should receive particular attention