Risk averse Germans play safe on mutual funds

These are tough times for German fund managers. Even DWS, Deutsche Bank’s mutual funds subsidiary, and leading player ahead of Deka and Union, experienced net outflows from its German distribution business in 2006. In some ways, the fund houses, and DWS in particular – which has enjoyed excellent performance – are victims of their own success. “We had very high gross inflows in the banking sector in 2006,” said Jens Kassow, head of German third-party distribution at DWS in Frankfurt. “But to generate net inflows is altogether more ambitious.” The problem, said Mr Kassow, is that DWS can sell ?500m of a new concept through distributors, but customers are wary of a possible correction, and are cashing in funds which they bought two years ago, which have gained 20 or 30 per cent. Now they want to switch that money to less risky strategies, and in Germany that often means certificates or guaranteed products offered by the investment banks. Despite a huge, defensive marketing campaign from German trade body, BVI, extolling the virtues of mutual fund investment, versus lodging savings in less transparent structured products, many risk-averse customers continue to prefer the latter. In response to the challenge from investment banks, DWS has launched a mutual fund investing in certificates and also set up the DWS GO certificates platform. “The number of people saving in mutual funds reduced last year, due to bad performance in 2000,” said Ralf-Joachim Gotz, director of DVAG, the 33,000 strong independent financial advisory network, which also has a close co-operation agreement with DWS. “Instead of benefiting from the still rising market, they sold off as soon as they got back to the year 2000 price.” German investors, unlike foreigners, do not trust their own domestic share market, lamented Mr Gotz. There are other challenges looming on the horizon. Joerg Brock, the man who brought in the open architecture system in retail branches of Commerzbank, Deutsche’s rival, has recently resigned from his position. This could be an indication that Commerzbank may be be scaling down its use of external parties – the main one of which is DWS – in a bid to sell more of its own Cominvest funds. And Deka bank, which has also chosen a list of preferred providers into which it guides its clients, has refused to partner with any Germany players. Foreign inroads Some foreigners are, however, making good inroads into the German system. However, the early entrants, Fidelity and Invesco, who came in with much fanfare at the turn of the millennium, have faltered. It is the newer entrants who are making the running. Société Générale Asset Management has pulled in ?1bn in just 18 months, and plans to double this haul. The French group has 10 staff in Frankfurt. Goldman Sachs Asset Management (GSAM) is also doing well, by focusing on providing mutual fund products to derivatives desks at German investment banks, thus benefiting from the German craze for structured products. The success of these foreign players is flying in the face of much protectionist talk in Germany, about the market being closed to foreigners. “Goldman Sachs and the rest of them can’t succeed without spending money advertising their brand,” said one senior player in the retail banking world. “They can persuade and intrude through banking relationships and they might deliver really good results. But in Germany, a retail client will only buy what he knows. You might have two funds, one branded, one not; you will never have any volume in the non-branded funds. Retail clients here are very risk-averse.” But the view from DWS is that German managers are disadvantaged against the foreign intruders. “Normally, no one has better chances in this industry than the Anglo-American, independent manager,” said Mr Kasssow. “The main hurdle we have to overcome every day is that we are a member of the Deutsche Bank group,” which is perceived as the key competition to all savings banks, he added. “If you are a foreign manager, you never have to even think about this.” Ingo Ahrens, who heads up the sales effort for GSAM in Germany is in confident mood. “There are not that many barriers here,” he said. “The key is to understand the market, the people, how the system works and the technical side of reporting.”

Kassow: implementing an ambitious plan to boost German distribution