The house that put strangers in the bedroom

Yuri Bender finds out how DWS is reacting to Deutsche Bank’s new found love of external funds at the expense of in-house products.

Few in Europe’s fund management community would dispute that competition makes for more efficient business practice. DWS, Germany’s premier retail funds shop, certainly puts its 26 per cent local market share of E88bn down to performance, innovation and a broad product range, which are all ahead of its peer group. But when that competition begins to entrench itself inside your own house, how should you react? At DWS, the initial anger and bewilderment have subsided and a new distribution plan has been hatched. The group’s parent company, Deutsche Bank, raised the ire of funds staff last year when it began to sell clients the funds of competitors including Fidelity and Invesco. The resulting blow to business has not been an easy one to counter. At E5.8bn for just the first nine months of last year, mainly in money market funds, new inflows for DWS in 2002 were still well ahead of the industry. But in-house sales have all but dried up. Now Deutsche Bank has formalised a new agreement with eight external partners. “Clearly, our competitors have gained a position in Deutsche’s client base,” concedes Axel Benkner, the company’s newly promoted chief executive who previously headed up DWS’ bond business. “We must now compete for our own position. Our strategy in Germany is to grow not only within Deutsche Bank, which has become more difficult. We are now increasing our unit sales through other distribution channels.” Striking change The change in investing patterns since Deutsche’s U-turn from selling only proprietary products has been a striking one, bearing in mind 70 per cent of DWS’ German assets are still managed on behalf of Deutsche clients. “In 2002, 100 per cent of our new business came from other channels, independent financial advisers (IFAs) being the biggest,” admits Mr Benkner, citing a deal with DVAG, which boasts 30,000 advisers in Germany and Austria. According to statistics from the BVI, the German fund providers’ association, of which Mr Benkner is president, investment groups expect banks’ share of sales to slump from 64 per cent to 52 per cent in 2010. Hence Mr Benkner’s German marketing machine will be concentrating on sales through IFAs, funds of funds and unit-linked insurance contracts. “The lowest quality IFA networks select by the criteria of who pays the highest fees. But luckily we have been in a position to have contacts with the best organised and most disciplined players,” reveals Mr Benkner. Some funds groups, such as rival house Deka, manage to sell huge volumes of funds of funds products, but refuse to open up to external providers, says Mr Benkner. But he believes pressure from clients, armed with increasingly readily available performance statistics, will mean DWS will be selected as provider by more groups. “If somebody is opening up and looks for external managers, they can’t avoid us, as we are the biggest and the best performing. Clients ask for DWS funds and urge their organisation to include DWS in their product range. Like a record shop in the 60s, if you have everything apart from the Beatles and Rolling Stones, then forget about your shop.” Because of the graduated nature of unit-linked insurance, maximum investments in underlying funds are not achieved until 30 years after the policy is sold. “This is the first year we have seen the importance of volume in unit-linked insurance,” says Mr Benkner. Investing in insurance-linked contracts is one way in which he believes individuals need to take greater responsibility for management of their wealth. The other is through retirement plans, including German AS-Fonds which can invest in both securities and property. But correct asset allocation is crucial. “Over the last three years, savings for retirement schedules have been based on equity funds. They were seen as the best investments for building up wealth and getting a pension. But this has led to incorrect, over-allocation in equities,” says Mr Benkner, referring to the woeful performance of Frankfurt’s Dax index in Germany’s recent, recession-hit history. “Real estate should be one of the classes in the diversification,” says Mr Benkner. “You cannot buy one square metre of land each year, but you can buy a fund.” DWS plans to launch new mixed funds which are also applicable for retirement plans. Currently, it runs just E250m in AS-Fond structures, “but they will be a key plank of our future success,” Mr Benkner reveals. Hedge funds are still in the blue-print stage. In his role as chief spokesman for German investment groups, Mr Benkner is negotiating the details of a new hedge funds law with the German finance ministry and banking supervisors. Industry optimists expect products to be launched at the start of 2004. “That is the earliest in a very ambitious time frame,” says Mr Benkner. “Then we will learn about the tax situation when we bring German hedge funds to be sold in other European countries.” Like others in Germany, Mr Benkner wants the locally registered vehicles to be able to compete on the European stage with the large funds registered in popular domiciles such as Dublin and the Cayman Islands. True innovators Having worked in the company since the 1980s, it is Mr Benkner’s view that retail shops such as DWS are the true innovators in the investment world, rather than slow-moving institutional operations. “In the institutional world, 95 per cent of products are benchmark orientated equity, bond, money market and balanced funds. Only small parts are invested in private equity and hedge funds,” he says. “But in the mutual fund world, we have made progress with guaranteed funds and products which invest in new market areas such as buying and selling volatility. All of these innovations take many years before they enter the institutional business, because it is the consultants who look for ideas for their clients. However, in the private client arena, you can invent the concepts, manufacture the funds and sell them immediately.” This is the strategy for the rest of Europe, where, over the next five years, DWS will concentrate on building up the kind of brand recognition it is envied for at home. Central to this Continental push has been the launch of the Luxembourg-based DWS Sicav, containing 21 funds, with a variety of fee structures according to market and distributor. Mr Benkner was quick to clear up some “mismanagement concerning documentation of prices of different assets” in this fund after an internal audit. He reported the problem to both Luxembourg and German regulators. The auditors confirmed that investors had not suffered. A deal to buy the portfolio management units of Zurich Financial Services has added E6.3bn, bringing total assets sourced from outside Germany to E30bn. “We now have access to the client advisers of the Zurich group in countries such as Austria, Switzerland and Italy,” says Mr Benkner. “Our awards for international performance mean it is the right time now to come to sales networks in other European countries.”

The saving grace of football DWS has chosen a sporting theme for its spacious new glass-fronted headquarters in the depressed district surrounding Frankfurt’s Mainzer Landstrasse thoroughfare. Moving workers away from a glamorous city centre location – such as Frankfurt’s Grüneburgweg West End district – is never an easy story to sell. But buying up memorabilia for rooms dedicated to the history of football clubs such as Barcelona, Manchester United and Liverpool is helping soften the blow to sports-crazy staff. DWS currently acts as a shirt sponsor for VfL Bochum football club, in the top tier of the German Bundesliga, rather than local club Eintracht Frankfurt, which is languishing in the lower league. “DWS wants to be associated with a first division image rather than second division,” reveals Axel Benkner, chief executive of DWS. The move has allowed some rationalisation, with obvious cost savings as staff from 11 separate locations – from both DWS and its sister institutional company Deutsche Asset Management – have been consolidated in one new headquarters. This means analysts from both companies can now share research.