Pension crisis could boost German funds

It has become fashionable to deride Germany as the “sick man of Europe,” plagued by unreconstructed heavy industry, militant unions

and acres of empty office space in Frankfurt’s business district. Current wisdom is that it needs the “short, sharp shock” administered by Margaret Thatcher to a once similarly ailing Britain. In those days the British were “hand-bagged” by their leader for not working as hard as the Germans.

Some international fund groups have decided it is too difficult to do business in Germany and that the public has no real appetite for mutual funds. Others, including Goldman Sachs, Schroders and Pictet believe development of Germany’s long-term savings market represents the biggest investment opportunity in Europe.

Pensions restructuring

Chancellor Gerhard Schröder recently emerged from a five-hour weekend cabinet meeting in Berlin, announcing the move to restructure Germany’s faltering pension system was “one of the most difficult decisions that we have had to make in our time in office”.

Because Mr Schröder’s government is blighted by 10 per cent unemployment, he needs to boost the economy. This, he said, is the reason for keeping employers’ contributions level and expecting workers to finance their own pensions, in order to deal with a E10bn funding shortfall.

Large volumes

Deutsche Bank and Commerzbank have already positioned themselves as leaders in open architecture, facilitating sales of large volumes of equity funds to private investors. The savings banks – or Sparkasse – are moving in this direction, with fund houses such as Fidelity and Invesco keen to penetrate.

German managers, including DWS, have pre-empted the challenge in a different way by re-shaping long term savings products to favour real estate rather than equities. German retail investors were more badly burned in the tech boom than many continental counterparts, following the collapse of the Neuermarkt in September 2000.

But this does not mean they fear risk as much as some foreign groups believe. Germany’s flourishing retail covered warrants market is the envy of London, and German investors have bought E11bn of exchange-traded funds in 2003 alone. This suggests that once hedge funds are introduced next year, there will be a sharp uptake.

While local groups will take advantage and launch hedge products, foreigners may wait in the wings, with banks offering funds of hedge funds in the form of certificates instead. Levels of transparency required may be just too high for the foreigners to swallow.