Investors reluctant to move into funds

There is still some hesitation among German investors to invest in funds, industry experts told delegates attending the Frankfurt European Fund Series event. The investment community is urging massive investment in order to minimize the effect of a flat rate withholding tax to be imposed in 2009. “It’s still the silence before the storm,” said Stefan Seip, managing director of the Bundesverband Investment und Asset Management (BVI), the influential umbrella association of the German funds industry. Despite this reluctance among potential clients, the industry is still hoping for a rush of new inflows in the coming weeks and months. “I am convinced that we are going to see a spirit of optimism because many investors and advisers will realise that now the time is right to invest in funds,” said Mr Seip. Currently, the level of German capital gains taxes levied depends on each investor’s personal income tax rate. But from 2009, finance minister Peer Steinbrueck will charge capital gains on all investments through a 25 per cent flat rate withholding tax. Therefore the fund industry hopes private investors will put money in their products before 31 December, to cash in on tax-free returns, or at least those with a lower tax burden than will be levied from 1 January next year. Some experts, however, were far less optimistic than Mr Seip. “People don’t know much about the new tax. This is the reason for sluggish demand. I hope for a booster but I am not too optimistic,” said Josef Altmann, country head for Germany at BNP Paribas Investment Partners. Christoph Hott, chief investment officer at German private bank Sal. Oppenheim, which moved its headquarters from Cologne to Luxemburg last year, blamed his own industry for ineffective promotion. “To rely on funds of funds [as the recommended vehicle to minimise tax] was the wrong argument against the flat rate withholding tax,” said Dr Hott. The strategy was almost without any effect. On the contrary, Thomas Tilse, who is responsible for portfolio strategy at Cominvest, the asset management company of Commerzbank, reported heavy capital inflows to funds of funds ahead of the new tax deadline. Because fund managers are allowed to shift capital from one fund to another without penalty, funds of funds are more attractive than those investing in certificates or structured products, which have to pay taxes, he said. Therefore funds of funds registrations have been booming in Germany since the beginning of the year. By the end of April, BVI recorded 652 funds of funds registered in Germany, compared to 486 a year earlier. But some critics warned against the flood of new products, which could lead investors to hasty decisions. Many funds of funds are being launched only to address the flat rate withholding tax topic, but don’t have any track record over a longer period of time, they say. Another problem occurs if the funds do not attract enough money to invest so they have to be closed again. “We were very sceptical about the new tax and we still are,” said Mr Seip. All efforts to strengthen private pension plans are being thwarted, he added. Investing in equity funds is still not the rule in Germany as the latest BVI figures show. Moreover, the industry suffered massive net outflows in 2007. “Putting money into equity funds is still an opportunistic investment,” said Mr Seip. Nevertheless, he sees the fund industry in Germany as a growth industry that trebled its volumes in recent years because more and more Germans use equity funds for pension planning, whereas direct investments in equity were far more popular in the 1990s. “The picture has completely turned. In Germany we have 8m holders of equity funds and only 4m people who invested directly into shares,” said Mr Seip. But Germany is the only country that has expanded the tax on returns from all investment types, he added. “These are disgraceful circumstances for equity,” warned Mr Seip, despite the initial aim to simplify equity investments through a flat rate and diminished bureaucracy. “The politicians may have hoped to repatriate capital from abroad but nothing really happened in that respect,” he said. Politicians have failed in their attempt to boost savings, and private investors in Germany are still way too unaware of the consequences of the flat rate withholding tax, said the BVI boss in his concluding remarks to the Frankfurt conference.