German market sees rise of the foreign manager

While the German investment market in recent years has witnessed a surge in ­structured products issuance, suffered some badly ­managed and poorly sold real estate products, and been party to a curious sideshow of an ineffectual experiment in the regulation of hedge funds, there has been one story that refuses to go away – the rise of the foreign managers in what has always been perceived to be a protectionist market.

That is not to say that all foreign groups have ­performed well – far from it, as fund houses need a good product range, strong retail brand and ­substantial investment in marketing resources in order to succeed in Germany. In fact, running contrary to recent trends, foreigners were almost as badly hit as domestic groups in terms of statistics showing ­industry-wide outflows gathered by BVI, the German fund houses’ body, in 2007. But a handful of non-German managers have made all the right moves and live to reap the benefits.

Recommendation list

One of these is JPMorgan Asset Management, which runs ?35bn sourced from the German market, and ­concentrates mainly on retail and wholesale opportunities. JPMorgan is no ‘Johnny-come-lately’ in Germany, however. It is celebrating its 10-year ­anniversary as one of the ­production partners for DekaBank. And while it missed out on a berth as one of the original preferred providers or ‘Star partners’ appointed by the country’s most high-­profile distributor – Deutsche Bank – it was added to the roster during the second phase in 2006.

“This was one of the major events in our evolution and was very important for us,” says Frankfurt-based Peter Schwicht, who has overall responsibility for the German business at JPMAM. “But it is also important for us to be in several systems of ‘guided architecture’.”

Recently, strategists at Deutsche have lamented that few of their selected partners can channel enough retail clients’ money into their products because they have the “wrong mindset” to succeed in the German mass market for fund distribution. It was observed there are too many institutional managers who have experience in running large mandates for pension schemes, but fail to adapt to the needs of the retail client and, more ­importantly, the bank adviser who supervises their portfolio.

“The way we overcame this was by looking at some of the market leaders, and at how they were doing it,” admits Mr Schwicht. “We realised relatively quickly that to have a product on the recommendation list is necessary, but it does not mean you are actually selling it. You need people in the field, a sales force which can, in a very short time, organise hundreds of presentations to branch offices and clients.”

This, believes Mr Schwicht, can only be done through substantial investment in local headcount. JPMAM has 12 staff covering purely bank channels in Germany. And these people need specifically crafted marketing material, not the standard presentation which many institutions trot out to institutional prospects.

“You look at the typical presentation, and it has 1,000 words on one page, detailing investment process and portfolio construction. This is not necessarily something you want to give to the retail adviser when one picture tells 1,000 words,” adds Mr Schwicht.

“If you want to be successful in selling good products, you need to be sure the adviser is successful. It is a mindset issue, and it’s about the need to look at ­distributors as your real partners – if they are not ­successful, then neither are you,” he says.

JPMAM is keen to scan the market and learn form the successes and mistakes of its competitors – be they German or foreign. “You can learn from every competitor, either how to do it, or how not to do it. Everybody can serve as an example,” says Mr Schwicht. For instance, he praises DWS, Germany’s largest manufacturer, for its efforts in spreading distribution beyond its captive ­network of Deutsche Bank branches. Among his foreign peer group, he cites Schroders – another favoured partner of Deutsche – for its “team, good culture, good brand and good products.”

Much of this reputation of Schroders has been built up by Martin Theisinger, until recently the head of the UK group’s operation in Germany. He has left Schroders, however, to run the Frankfurt operation for Fortis Investments, at the same time that Achim Küssner joined Schroders from BlackRock. Even more significantly, three members of Mr Theisinger’s team who enjoyed such ­success at Schroders have joined him at Fortis.

One of his tasks will be to leverage some of Fortis Investments’ institutional skills, such as the Dutch group’s SRI expertise and its balanced institutional ­mandates run by portfolio managers in Dusseldorf, for the retail distribution market. While Mr Theisinger is keen to recreate the kind of relationship he had with Deutsche Bank at Fortis, it is more important for him to achieve distribution through a ­variety of channels, rather than just servicing one institution.

“Deutsche Bank decided on eight strategic partners and there will be reviews, and we will be there in the queue, waiting in line with many others,” says Mr Theisinger. “But we don’t need to be depressed, even if we are not chosen. They still take your products on board, even if you are not a strategic partner. The best example is Pictet, which got through the doors of all the distributors with its water fund, despite not being an official partner.”

Mr Theisinger does note that some German banks may be re-examining their approach to distribution. Commerzbank is one which is being watched closely by manufacturers, not least because of the departure of its open architecture champion Jörg Brock at the beginning of 2007. Since the launch of the programme for the expansion of Cominvest – the bank’s proprietary funds house in the domestic German market – there have been voices in the bank suggesting Commerz branches would begin to concentrate on selling Cominvest products, rather than external funds, in order to boost assets under management.

Reviewing arrangements

This is believed to be one of the reasons Mr Brock and Commerzbank parted company. As the man who ­introduced and drove the concept of selling third-party funds through the branch network, it seemed his ­position would be untenable if there were a reversal of this policy. Officially, the bank denies this is the case, but now that Cominvest has improved its performance in core products, it may be more difficult to sell ­competitors’ funds through branches. “Some banks are looking at, and reviewing, their arrangements,” acknowledges Mr Theisinger. “Was outsourcing the right thing to do, or should they be going back to more emphasis on their in-house products? This may be ­something to watch, but the best-of-breed approach ­cannot be changed. I don’t think any major German bank will go back to the client and say: ‘We only have house products for you now.’ It definitely won’t work.”

Fortis Investments manages ?3bn on behalf of German clients, and their target is to burst through the ?10bn ­barrier within five years. This ties in with the parent bank’s ambition to make Germany the fourth home ­market for Fortis after the Netherlands, Belgium and France.

But the saying in football, that one should “never write off the Germans”, is just as true in asset management. Sebastien Klein, head of Cominvest, has plans to boost assets from the current ?62bn to ?100bn by 2011 through the Alpha programme, which involves increasing the numbers of distribution outlets in Germany and, in particular, selling through third parties.

Certainly, there is some local scepticism about whether Dr Klein’s highly ambitious targets can be achieved. But there is clearly a high regard for Cominvest equity funds, which are praised as “wonderful products” by Mr Theisinger.

And as Paul Burik – responsible for reshaping Commerzbank’s asset management operation, including recent sales of Japanese, French and UK subsidiaries – states, much of the growth for Cominvest can come from leveraging German-managed strategies for foreign ­markets. “There is pressure from ­foreign ­companies, which started on the institutional side in Germany 10 years ago and spread into the retail space in 2002.

“Both foreign fund managers and [capital markets-based] certificates have made deep inroads into the business of German fund managers, and it’s a challenge just to stand still,” with the producers waiting for some traditional distributors, such as the regionally ­powerful sparkassen and volksbanks, to open up to ­selling third-party funds.

As the BVI, which collects figures and gauges the mood of the German industry suggests, the current depressed state of the industry is not about ­performance, as equity markets have been generally good in 2007. It is about sentiment, and the reluctance of investors to enter ­equity markets, preferring instead capital protected ­certificates. This has been true as much for foreign firms, as for Germans.

In fact, the old perception in the marketplace of a ­selection bias towards foreign firms has been replaced by a “new appreciation that local producers are at least as good as UK, US and French-based managers,” believes Mr Burik. While admitting that Cominvest has been slow, in comparison to rivals such as DWS, in selecting the best of its German strategies for ­distribution in Europe, Mr Burik draws attention to group specifics, which have made it difficult to expand.

“DWS and Deka never had the pressure that Cominvest had of massive outflows – not just due to ­certificates, but due to switches from house funds to third-party products. When that is happening, you need to work hard to offset losses, which you know are ­coming, but build up a client base through other channels.”

The truth is that all German houses are facing an uphill struggle. Even DWS, which runs ?165bn in Europe, is facing problems at home, with 2007 proving a difficult year, with significant outflows in equity funds, despite their good performance. While there were strong inflows in the first half of 2007 into money market funds (where DWS is the market leader), the trend stopped in July and August due to the subprime crisis.

There was strong desire among senior management to keep the flagship asset-backed securities fund open but, as a result, the value of the DWS fund halved from ?3bn to ?1.5bn. Even though there was no direct ­exposure to subprime assets, investors did not differentiate.

One of the brighter spots has been the DWS GO ­platform, a strategic move enabling the German house to create certificates and structured funds in order to compete with investment bank-sourced products. Those talking to distributors say that when the product buyer asks about structured products, “in the past we had to say ‘sorry’ and the conversation was over. Now we are still in the conversation”.

Even investment banks are expected to increasingly adopt fund structures for their capital markets products to prevent themselves being hit by a new German 25 per cent tax on capital appreciation and income.

Using a fund shell may also help the banks side-step MiFID requirements for transparency, which will require much greater dialogue with customers of retail ­structured products. According to some, the funds industry, which has prosecuted the war on structured products with such enthusiasm, and publicised the beauty of the fund as a vehicle for investors, may have been a victim of its own success. “A Trojan horse has appeared, which allows the investment banks to bring in their products into the funds world,” says one prominent member of the German funds industry. “But, unlike the original story, we on the inside have created the horse ourselves.”