Image problems paint grim industry picture

Germany’s asset management industry faces substantial challenges. The industry is operating in a rough environment characterised by lowering risk-appetite of corporate customers, rising competition in the provision of retail funds, stagnation in the volume of institutional funds, increasing complexity of tax and legal requirements, more control and regulation, rising perception of risk, escalating costs and increasing pressure for transparency and service-orientation. This somewhat uncomfortable verdict came from Rupert Hengster, spokesman of the management board at Germany’s leading private bank, Sal Oppenheim, in his address to the third seminar of the European Fund Series in Frankfurt, an organised by PWM with the support of BNP Paribas Asset Management. The industry also suffers from a serious image problem in German public opinion, speakers told the audience of 150 leading fund manufacturers and distributors. In 2005, a group of Anglo-Saxon hedge fund companies sent shockwaves through the market after it opposed Deutsche Börse’s merger with the London Stock Exchange and forced its management board to leave. This led to the now infamous comments from Jochen Sanio, chief the German financial sector regulator BaFin, who described hedge funds as “black holes with excessive indebtedness” posing a serious threat to the stability of the international financial system. Rising foreign private equity fund activity lead secretary general of the then ruling Social Democratic Party, Franz Müntefering, to qualify investment funds as “locusts”. Finally there was the real estate fund crisis involving Deutsche Bank, a group suffering a strong image problem in its home country. Between mid-December 2005 and mid-January, three of Germany’s biggest funds, one from Deutsche Bank, the others from KanAm, were frozen. In December 2005 alone, ?3.4bn was withdrawn by investors in this sector. The real estate sector is made up of 35 open-ended funds with ?85bn under management. A fire-fighting operation by the BVI, Germany’s fund management association, which acted jointly with the government and new legislative proposals have already had their effects on bringing back investors confidence. Trend of withdrawals Since mid-January, there has been no noticeable trend of withdrawals and Deutsche Bank’s fund has recently re-opened. There are calls from the BVI on the regulatory side for “continued development, optimisation, preparing for future hazards”. The challenge ahead is to give more weight to a real estate investor as a core customer. This will be the job of real estate investment trusts (Reits), but the introduction of so-called G-Reits (Germany Reits), scheduled for 2007, remains uncertain, with issues regarding disclosure of profits and their taxation yet to be fully addressed. However, the real-estate crisis appears to have been short-lived and the real story is growth and opportunity. According to Dr Hengster, real estate funds’ annual growth rate in Germany is currently ?3bn. There have been notable price increases, reasonable in commercial real estate, but with some bubble-like features in housing. Once approved, the market for Reits is expected to reach a value of ?50bn to ?80bn, he believes. However, their profitability for sponsoring institutions is still under discussion, with their introduction in Germany liable to lead to short-term over-supply of funds. But whether Reits are introduced or not in Germany, institutional real estate funds will become increasingly important, especially for insurance companies and pension providers, said Dr Hengster. Another substantial area of growth highlighted by Dr Hengster, has been the Zertifikate (structured bonds, or covered warrants). According to Dr Hengster, this investment banking-led product, based on a tactical, but mainly short-term strategy, competes with classic asset management products, which are more long-term oriented. The recent surge in certificate sales is due to the increased room for product innovation and creativity which their structure provides, suggested Dr Hengster. Growth rates are impressive, 45 per cent during 2005, with the potential to reach a value of about ?110bn by the end of 2006. More recently, Zertifikate managers’ strategy has tended to become more “middle-term”. Today, they are made up of 99 per cent investment products, and just 1 per cent leveraged products, said Dr Hengster. This is a major change to 10 years ago, when leveraged products were at the heart of the Zertifikate strategy. No other financial product has shown such impressive growth rates. In this context, Dr Hengster thinks that it is time for the Zertifikate to present itself for proper regulation, but not, he immediately warns, “over-regulation”.

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Hengster: certificate sales are driven by more room for product innovation