Germans greet pensions overhaul

The so-called Riester reforms, along with poorly performing individual stocks, have inspired a new style of portfolio design, writes Anna Bawden .

German investment portfolios have changed considerably over the last decade. Until the mid-90s, portfolios were usually constructed using a mix of passbook savings accounts and life insurance for personal pension provision. Mutual fund and direct equity investments were rare among private investors. During the period 1998-2000, a sharp increase of inflows into mutual funds and equities became much more mainstream. Still, cash and bonds remained the staple of German portfolios. Then, in 2001 a number of factors shook up portfolio planning in Germany. The major stimulus for change has come from the pension reforms, implemented by finance minister Walter Riester. The Riester reforms, as they have come to be known, have fuelled the private pensions market. Many foreign fund houses and asset managers are entering the fray. They have all recognised that Germany is in dire need of pension products and that there is therefore huge growth potential. The reforms allow 4 per cent of Germans’ salaries to be invested in private pension insurance policies, investment funds or bank deposits. As providers are obliged to give capital guarantees, this is likely to stimulate investment in equities from risk-shy investors. A recent survey by German publication Cash revealed that financial planners and asset managers have experienced greatest demand for equity funds, unit-linked life insurance and personal pension funds. This is not just driven by the Riester reforms, but also by the poor performance of individual stocks. Money market funds are particularly popular with German investors. In December 2001 alone, the five biggest money market providers in Germany reaped E2.34bn in asset inflows. In comparison equity funds attracted only E1.05bn in inflows. Real estate funds are also growing in popularity, with E5.4bn of inflows in 2001. Demand for hedge funds however is minimal among German retail investors. Market volatility, low interest rates, September 11 and the Enron scandal have made German investors much more risk/return aware. Although FAZ Institut/Deutsche Bundesbank calculate that 38 per cent of German private client portfolios will be in equities by 2010, investors and portfolio planners alike are placing ever greater importance on value at risk assessments. In a review of top-performing German registered fixed income, equity and private pension funds for PWM, RiskMetrics Group analysis reveals that there are very different levels of risk within asset classes. Bonds, which are considered a conservative investment, could normally expect to have a risk grade of around 100 basis points. Yet only the Activest Invest Lux Emerging Rent bond fund kept to or under this volatility since autumn 2001. Scudder GOF Emerging markets Bonds A2 had a risk grade ranging from 180 to 400 during this period, and Prumerica Emerging Markets FI a 150-210 since December. By comparison, top performing equity funds have had very low risk grades since September. AWD, one of Germany’s leading broker networks, reports a shift in attitudes among German investors in 2001, particularly since September 11. Stefan Everding, product director at AWD says: “German investors have been more cautious since September 11. There is little interest in investing in equities. Investors are waiting to see what will happen.” Mr Everding says that as most German investors do not understand bonds and equities, they are not investing in funds as they do not know which ones to go for. In February AWD started marketing Morgan Stanley’s managed account products to its clients. As Morgan Stanley offers investment banking standard investment management, AWD feels clients are therefore exposed to world-class asset allocation at much lower entry levels. There are four strategies for AWD clients to choose from: one aggressive and three moderate. The four are all pooled managed accounts with minimum investment of E5000. Morgan Stanley usually charge E250, 000 for this service. Mr Everding says managed accounts are a key growth area, and are more popular than fund of funds for which “there is relatively little demand.”