June 8, 2012 3:18 pm

Funds sector: Products restructure as citizens lose trust

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It is not just Frankfurt’s banks that are suffering in the financial crisis. Its asset managers, the bedrock of Germany’s €1.9tn funds sector, are having to deal with the obvious financial effects of nervous savers’ reluctance to invest, as well as with the more uncertain outcome of planned regulation for the sector.

“Many citizens have lost trust – in the stability of our currency, in the financial system, and especially in the capacity of European politicians to solve the debt crisis,” said Thomas Neisse, the president of Germany’s investment and asset management association, the BVI, as he reported on the €16bn of withdrawals from retail mutual funds last year. “Private investors’ sales can be blamed on the search for security.”

Some money flowed back in to mutual funds in the first quarter of the year, and Germany’s funds sector remains substantial – with assets under management equivalent to twice the market capitalisation of the German stock market. Investment from institutional investors rose last year, with Mr Neisse, also chief executive of Deka Investment, speaking of a “market with two faces”. Indeed Germany’s funds are becoming increasingly the province of institutional investors, whose share of total assets has risen almost twice as rapidly as that of retail investors since 2003.

The BVI, which represents more than 80 asset managers, says the government should do more to give funds a level playing field to compete with the life insurance sector as a long-term way for retail investors to build retirement savings.

Another challenge for the funds sector comes from the review of the EU’s Markets in Financial Instruments Directive (Mifid II). The European Commission wants to prohibit independent financial advisers from receiving fees from product providers. The BVI says it welcomes Mifid II if it promotes fair competition between independent and tied advisers. But it is concerned the review will also put a number of types of mutual funds into the category of “complex” products, which would limit their availability to retail investors.

Specific problems surround a sub-sector of Germany’s funds landscape, namely its open-ended property funds, many of which are struggling for their future. Paradoxically, this is happening at a time when German investors have seldom had so much interest in investing in property, seeking shelter from the eurozone crisis in bricks and mortar assets.

The problems for the property funds, where €85bn is invested, arose in large measure because they traditionally allowed investors to make virtually on-sight withdrawals in spite of the obviously illiquid nature of their property assets. This was more or less sustainable until the financial crisis, when many funds had to block access and freeze redemptions when a large number of investors ran for the doors.

Such pressures led in 2010 to the first announced liquidation of an open-ended property fund in the 50-year history of the sector. Others were suspended.

Remaining funds must introduce rules that should, in effect, redefine them squarely as retail products by requiring long notice periods for all but the smallest withdrawals.

When two of the biggest suspended funds – run by SEB, the Swedish bank, and Credit Suisse – tried to reopen under these rules last month, they were overwhelmed by demand for redemptions. They now plan to liquidate their assets completely instead.

“Liquidating the fund is the right thing to do, even if we regret taking this path,” said Credit Suisse’s CS Euroreal property fund.

“Many investors understand that the long-term stabilisation and continuation of the fund is only possible on the basis of amended conditions. Nonetheless, some of these investors only wish to make investments which they can access at short notice,” the company added.

Eight of 20 German funds primarily aimed at retail investors are now in the process of liquidation, according to Credit Suisse. But analysts say a consolidated property fund sector still has a role to play, with the winners likely to be the big Frankfurt banks and asset managers, such as Deka and Union Investment, which have strong nationwide sales networks.

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