‘SELF-ESTEEM’ RETURNS TO COMINVEST

When Sebastian Klein appeared at the helm of ­Cominvest as its youthful chief executive in 2005, promising to reshape the ailing funds house, the main thing he had to combat was a lack of self-belief. Despite an impressive headquarters overlooking Germany’s financial capital of Frankfurt, there was a feeling that his newly acquired employees had lost their way in recent years. Of course, management had something to do with this. The group was in the midst of downscaling from a company with ambitions spanning the US, Japan and the UK, to a ­German-centric, domestic funds house. After a period of fast and furious global expansion in the 1990s, the Commerzbank Asset Management group had E130bn under management at the turn of the ­millennium. Five years later, assets had more than halved, most of the jewels had been auctioned off, and the bank had moved into a new era of “open architecture”, treated with widespread suspicion and resentment internally. With morale and ­performance both at a low point, Commerzbank was forced to open its doors to ­products run by the world’s best, ­humiliatingly including cut-throat local rivals DWS. “Cominvest used to be a strong asset management house, but several years of strong outflows reduced self-esteem,” reflects Dr Klein, who, at 39, is a veteran of ­private German bank Sal. Oppenheim, ­consultancy McKinsey – well known for its restructuring zeal – and the ­private client unit of ­Commerzbank, Germany’s ­second bank and owner of Cominvest. “With the new management team, and the ­success we’ve had, that self-esteem is coming back slowly. Over four-to-five years, our asset base was melting away. We had to ask: ‘What are we going to do about it?’ This was the trigger to decide the growth strategy for the group.” Big ambitions, big plans Dr Klein and Achim Kassow, his boss and Commerzbank board member overseeing asset management, launched a programme that seemed wildly ambitious to people both inside and outside the company. Many remain sceptical of their ambitions because of the firm’s recent history. But they are not unrealistic. Dr Klein was tasked to nearly double assets to E100bn by 2011. “We had only E52bn when I joined,” he remembers. “But which choices did I have? One option was to say, ‘Let’s move to E75bn in five years,’ but then our critics would say, ‘It’s probably just the market.’ Yes, E100bn is ambitious, but I am pretty confident we can get there, as we are already on E62bn today.” There is little sentimentality about Dr Klein. His focus is on increasing and ­improving ­distribution outlets. But, at the same time, he understands that the ­commodity being sold to customers had to improve. This is why he has refined the way in which funds are ­managed to both boost performance and retain key staff, without too much tinkering with the investment process. The first change was to consolidate Cominvest’s belief in fundamental equity research by improving the standing of researchers. “Traditionally, in our company, the researcher used to work as a junior assistant of the fund manager,” says Dr Klein, who oversees 600 staff, mainly in Frankfurt, but also in Munich, Luxembourg, Dublin and Dubai. “Now we are looking for reasonably senior researchers with a track record. The exchange of ideas between researchers and fund ­managers is very ­productive, and the results are very high. We now pay the same value to research as to fund management.” The second change was to restrict stockpicking to the ­European markets, where ­Cominvest has strong experience. “Any fund that goes beyond Europe can only be justified with an umbrella fund or quantitative approach,” believes Dr Klein. STRATEGIC DEcISIONS The old refuge of last resort – using other group entities to sub-advise Cominvest products when they are performing poorly – has also gone out the window now that the group’s satellite arms have been offloaded. CCR, the Paris ­organisation that runs E14bn for predominantly ­institutional investors, was sold off to UBS at the end of 2007, following the sale of Jupiter’s £28bn UK retail organisation in 2006, and the pioneering Japanese franchise has also gone. “We never used the foreign entities of our group as a ­hiding place,” says Dr Klein, shaking his head. “The impetus behind their sale was a strategic decision. The core market for ­Commerzbank is the one for German private and ­institutional clients. We want to provide asset management solutions, and Cominvest is the right vehicle to do this.” In order to help make Cominvest the vehicle of choice for this demanding client base, management is investing E100m over five years to boost product quality and distribution. The group also decided to move some operations from Munich to Frankfurt. The move was never expected to be popular, and 30 out of 70 sales staff – including some good performers, say industry sources – parted with the company. But to revive fund sales in a company that committed itself to an open-shelf policy has been one of Dr Klein’s key achievements. “Commerzbank decided in the retail ­business to go ahead with open architecture. Other banks don’t sell Cominvest funds. It was not my decision to choose this route. And I believe that looking at developments in distribution and markets, open architecture is not favourable for our fund ­management business,” reveals Dr Klein in a moment of ­candour. “But look around and you will see there are many more distribution channels, which people have as part of their value proposition, providing funds from different financial institutions. We do not need to rely just on banks; there are also insurance companies, IFAs and other financial groups.” Improved performance Joerg Brock, the bank’s head of products, who quietly but determinedly pushed through the policy of selling external funds in 2001, has since left the company during speculation that his programme of customer choice would be reversed. Talk amongst management was that tough targets imposed on Cominvest meant “fund picks” passed down to branch staff would now comprise mainly internal funds, rather than the choice of the market as previously. Dr Klein puts the change down to improved performance, rather than any secret dictat handed down by bank bosses. “Fund picks in branches are now more likely to be ­Cominvest, as the ­potential for innovation and performance has been much better,” states Dr Klein. “We have much more shelf space in the context of open architecture. Our Multi Asia active fund has been the clear leader and was a big seller in 2007.” Typically, from 2001-2005, industry sales figures ­published by the BVI, the German funds industry body, would put Deutsche Bank’s fund house, DWS, in first place, followed by Deka, and then a long list of competitors ahead of ­Cominvest, says Dr Klein. Making history September 2007 marked a watershed, with the results of Dr Klein’s “turnaround programme” showing Cominvest in the top spot “for the first time in history”. Cominvest saw healthy net in-flows of E4.3bn in 2007. Not only does he want to top the tables on a regular basis, but there is also the matter of expanding in selected markets outside Germany. “Our natural next steps will involve looking at ­markets open enough in Europe to sell foreign products,” adds Dr Klein, who says Cominvest already enjoys strong global ­relationships with distributors such as UBS and Credit Suisse. “At the moment, we will be concentrating more on the German-speaking segment of Europe.” As far as product innovation goes, Cominvest hopes to build up a series of hedge fund products, though these will be designed “in a different way to what you normally think”. These products will now be ­constructed internally, following previous experience when Commerzbank tried to offer ­customers hedge products through a New York-based platform, which later suffered financial problems. “We have now decided only to promote products we ­provide ourselves,” says Dr Klein, describing an alpha ­generation programme where managers of equity, bond and multi-asset funds will be asked to give their top five and ­bottom five investment picks as part of hedge products to be built up “very close to our core business. We need to be patient, but this business will develop – maybe more slowly than in the UK or Switzerland, but it will come.”

Dr. Sebastian Klein