DEKA funds business heads back to basics

One of the first changes made by Oliver Behrens – the DekaBank board member responsible for the institution’s E147bn mutual funds operation – when he joined in 2006 was a streamlining of the firm’s often obstructive management structure. “We reduced our hierarchy in pure management from six layers to two or three, giving responsibility back to the people who run the money, and diversifying the fund management team to a more European type of operation,” notes Mr Behrens. The new formula was based on adding foreign talent to a previously German-centric equity team in order to improve performance, which had gone through a weak period in 2003 and 2004. And crucially, for fund managers, rather than their bosses, to have full say in the way they run their assets. The changes did the trick. Performance improved significantly in 2006 and 2007 in German, European and quantative equity strategies. Deka Investmentfonds, which had previously fallen behind its competitors, and was seen as a backward player due to its links with rural savings banks, is now the envy of the German industry. Sales wise, its funds are now second in the German League. “And our three year track record is back on the same level as the main competition,” confirms Mr Behrens. “We are seen by some of the other players as boring and not innovative enough. But now, everything is going back to the roots. You need to do business you understand in a region you understand.” His comments are partly aimed at Deutsche Bank and its funds subsidiary DWS, his previous employer and key rival, where he spent 23 years and was a popular and approachable figure both in the boardroom and on the trading floor. But while Deutsche has now made a move to make toxic assets part of history, and concentrate on savings and private wealth management business rather than investment banking, Mr Behrens says his ex-employer is just moving to the space his new one already occupies. Rather than unveiling any ambitious expansion plans – the fighting talk was already done by Mr Behrens when he joined the group – the future is about the basics: selling investment management products to clients of the Landesbanken (regional state banks) and Sparkassen (savings banks), which jointly own Deka. “If you want to tour Germany, you can always travel the country with Deka,” he jokes in a minor pastiche of a recruitment ad for the type of global organisation now suffering in the recession. With an almost non-existent appetite for so-called “fancy products” in Germany, Mr Behrens expects the new reality to exclude sales of anything remotely opaque or complex, such as structured products and collateralized debt obligations. “Before the crisis, the retail man in the street could not differentiate between a certificate and a fund. Now they know the difference,” he says, commenting on the Germans’ love affair with almost unregulated capital market, derivative-linked baskets of shares, known as ‘certificates’ and issued regularly by the country’s high street banks. Around E100bn of these securities, often bought by retail investors at the expense of better regulated and safer mutual funds, remains outstanding. Many German families lost money because the counterparty to the issuers was the now-defunct Lehman Brothers bank. “With a certificate, you have all your eggs in one basket. In a fund, [the investor] is a shareholder and part of a bigger pool. Both risks are the same if the world folds completely, but that is not our expectation of the future.” Nevertheless, some of the so-called safety first products peddled by DekaBank to the conservative investors of the country’s savings banks should be carefully scrutinised. Crisis point While Mr Behrens' sales teams are concentrating on guaranteed funds, German investors’ reliance on real estate funds and covered bonds, known as pfandbrief, have caused some worries. “The whole covered bond market was in danger of collapsing, therefore the bail-out of Hypo Real Estate was necessary to restore confidence,” says the head of a major Frankfurt-based consultancy, referring to the recent Government-led E50bn rescue package for one of Germany’s biggest lenders. In October last year, Sal. Oppenheim, Germany’s largest independent private bank, was forced to write to all clients to tell them that their covered bond-based investments were safe amid increasing nervousness. Mr Behrens admitted during the autumn that even investors with conservative portfolios were suffering “sleepless nights,” although they would be able to “ride to safety.” A spokesman says “tensions have eased” due to the government support. And although investors have short memories, it is only three years ago that three of Germany’s largest real estate funds were frozen after huge withdrawals from investors in the space of a month, and the industry had to be forcibly stabilized by a joint initiative between the government and the BVI association of mutual fund houses. Real estate funds in Germany have typically been sold in bank branches as a cash substitute, with investors not always aware of the risk and liquidity profiles of the products they buy. Mr Behrens – whose responsibilty does not include real estate products – says new practices at Deka ensure that only a limited amount of units can be purchased by investors each year, getting rid of the problem of investment managers becoming overburdened with subscriptions and having to shop for real estate in unfamiliar territory. Cash, near-cash, short-term debt and corporate bond funds have been the most attractive products for Deka’s retail clients, who contributed to a record E70bn in gross inflows during 2008, mainly into guaranteed and fixed income products. But outflows from equity products, due to increased risk awareness, in October and November, leave the divison E4bn down over 2008. Mr Behrens believes in a volume game of engaging more investors. “There are 40m retail clients in our sector with enough liquid cash for investing in mutual funds,” says Mr Behrens. “We have 5.5m of them. But even with 10m, we have significant growth potential, even if the markets are not growing.” Retirement planning in Germany is still in its “childhood stage”, he believes, with huge potential for banks and their clients to profit from investing in self-selection pension schemes under the Reister and Ruerup plans. He expects significant flows into tax-optimised funds in 2009, after the introduction of a new withholding tax on income. These are part of an initiative from the association of savings banks, including larger players such as Haspa (Hamburg Sparkasse) and Sparkasse KölnBonn, which has called for tailored offerings aimed at its private banking and wealth management segments. One likely solution may be a portfolio containing a mixture of open and closed-ended property funds. Despite these opportunities, he remains sceptical about the future for foreign-owned managers, such as Goldman Sachs, BlackRock and Schroders, who have raised assets and are increasing investments in Frankfurt-based staff to service the German market. “When you look at the numbers and potential growth rates, they are absolutely right to increase their resources,” comments Mr Behrens. “But will market shares be divided differently than in the past? My answer is ‘no’.” The so-called ‘Big Four’ of German investment – DWS, AGI, Deka and Union – have held similar market shares for the last 10-15 years, he says, and although there have been factors differentiating their medium-term performances, the Four have held onto an aggregated 80 to 90 per cent of retail sales. Foreign influence “If the market is big enough, some foreign player can concentrate on big shots,” he observes. “But unless the market changes completely to the UK model, where IFAs have 90 per cent of retail business, and distribution continues to be done by the banks,” which own the fund houses and therefore enjoy captive distribution through their branch networks, “then it will always stay the same. Foreigners open and close offices and change staff,” continues Mr Behrens. “Looking at current evidence, the success rate of foreign players in Germany has not been exceptionally high.” But there will continue to be pressure on Mr Behrens. Because his sole source of clients is the savings banks, he must not only create new products for them, but also block out the competition, in an age when many savers are asking for external funds, in the same way as clients of Deutsche and Commerzbank did at the turn of the Millennium. “We are so dependent on our main client – the savings banks – that we have to ensure we can deliver the quality of service they expect,” says Mr Behrens. And Deka craftily controls access of foreign managers to the clients of his savings banks. He calls it ‘open architecture’, but the reality is slightly different. “We have a fund of funds business where we also include third-party funds from our co-operation partners,” reveals Mr Behrens. Third parties on the platform include Blackrock, Goldman Sachs, JPMorgan and Schroders. “The foreigners come to us, if they have an interesting product and we are open to discuss it - if it fits into our asset allocation.”