Investment consultants are fast becoming a critical driver of new business for foreign asset managers in Germany, according to Peter Schwicht, managing director of JPMor-gan Fleming Asset Manage-ment’s (JPMF) office in Frankfurt.
He said: “Three years ago, about 10 per cent of new institutional mandates came through consultants, two years ago it was 20 per cent and last year we received 40-50 per cent of new business via consultants.”
With $21bn of German assets under management, of which $8.6bn is for institutional clients, JPMF is the largest foreign fund manager in a market it entered 15 years ago.
Mr Schwicht said consultants are instrumental in advising on specialist investment briefs that form part of a core-satellite asset allocation model increasingly being adopted by their clients.
“For large pension funds, consultants are advising global equity mandates, while for smaller pension schemes, they advocate sticking to European equities and awarding mandates such as growth or value or small-cap equities,” he explained.
Besides the consultants, volatile stock markets and the growing sophistication of investors are cited by Mr Schwicht as key factors fuelling interest in specialist mandates and the use of foreign managers.
He said: “The watchword in Europe is diversity. Investors want more sources of alpha. They realise it is becoming more important in light of the lower yields from equities and fixed income.
“They are allocating more to alpha and investing in different products and investment processes.
“Why is this happening? Investors are becoming more professional. There is a new generation of portfolio managers and chief investment officers.
“Last year, CIOs and chief financial officers had a wake-up call when some of the corporates were downgraded because of pension liabilities.
“Pension shortfalls are now a concern for these people and not just the treasurer. That ensures that a lot of attention is being devoted to the asset allocation process.”
JPMF notched up net business growth in Germany of $1.3bn in 2003. But Mr Schwicht said asset growth is less of a priority as “we’re looking to win profitable business, mandates that attract higher fee income”.
Core mandates tend to be domestic balanced or core European equity, managed by German-based asset managers at very low fee levels.
JPMF’s strategy is to pitch for specialist mandates not necessarily within the domain of domestic managers.
Many large and medium-sized pension funds are breaking free of captive client relationships with domestic asset managers at their hausbank and outsourcing their assets. Mediocre performance coupled with the influence of consultants means investors are becoming more open to foreign asset managers.
Mr Schwicht said: “At a time when many domestic players are losing market share, we are not focusing simply on winning mandates from other foreign fund managers. We are trying to prise assets away from domestic managers because that’s where, by far, the largest share of assets lie.
“For instance, you don’t meet a lot of German players in the market who can manage Asian equities or value portfolios. So there are opportunities for foreign managers to win specialist mandates.”
Jittery stock markets are causing investors to turn away from benchmark-driven investment products. Consequently, JPMF is devoting more time to promoting total return, absolute return, long benchmark and high alpha products.
Mr Schwicht said that interest is growing because investors want to make money in the long run.
He said: “If we tell them that we beat the benchmark by 5 per cent but that the benchmark is down 50 per cent, they are not happy.”
In a bid to capitalise on the search for alpha, JPMF launched a tactical asset allocation (TAA) product in Germany late last year. To date, JPMF has won TAA mandates in Germany worth $1.8bn.
European value, growth and small-cap equity and convertible bonds account for the majority of mandates being won by JPMF from corporates, occupational pension funds, banks and insurance companies in Germany.
The firm is also winning Asian equity and Japanese equity mandates, mostly from investors who are dipping their toes into these markets for the first time.
German assets under management in Asian equities have grown from zero to $500m in the last 18 months.
The biggest issue for most pension funds is real estate investment, according to Mr Schwicht. Property is considered a core rather than an alternative asset class in Germany and is currently attracting allocations of 5 to 10 per cent.
He said: “Because they are all invested in German real estate, investors need to expand their portfolios across Europe. There will be a move away from domestic real estate towards Europeanand, eventually, global real estate.”
Despite the growing interest in specialist equity mandates, German investment portfolios are still dominated by fixed income. As government debt has fallen out of favour, investors have moved down the yield curve to embrace corporate and high yield bonds, global, US and emerging market debt.
Pension reform promises foreign fund managers a wealth of outsourcing opportunities should new corporate pension schemes ever materialise. The German government recently announced it was going to gradually reduce the value of statutory pensions in a bid to encourage the speedier establishment of private funded schemes.
Given the snail’s pace of progress so far on this politically-charged issue, few investment briefs are likely to emerge for a long time yet.
The great Nordic opportunity
Nordic countries have contributed a respectable $2.5bn of pension fund assets to JPMorgan Fleming Asset Management’s (JPMF) coffers.
Douin: ‘growth potential’
Increasing interest in specialist mandates and a growing acceptance of foreign fund managers is being driven by the same search for real return evident in Germany and other European markets, according to Francois Xavier Douin, JPMF’s relationship manager for the Nordic region.
He said: “In addition, Nordic markets were later to embark on a programme of international asset diversification so there is further room for growth. While all the same investment trends are evident, the Nordic region is less advanced in pursuing them. That is why the region has greater growth potential for a firm like ours.”
Nordic investors tend to choose global equity mandates rather than European equity mandates. If European equity briefs are granted, it is invariably with a domestic bias.
Specialist mandates tend to be for asset classes such as small-cap equities, US or Japanese equities.
Sweden is JPMF’s biggest market, fuelled by the outsourcing exploits of big pension schemes such as the AP Fonden.
Mr Douin said: “These funds are driving investment trends and are in the vanguard of a huge outsourcing trend in Sweden.”
He added that Swedish investors had enthusiastically embraced hedge funds.
“It is probably the pensions market with the highest allocation to hedge funds. They use both funds of hedge funds and single manager hedge funds,” he said.
But despite Sweden’s lead in outsourcing specialist mandates, domestic managers are still more dominant there than in the other Nordic countries.
Mr Douin pointed to a shift away from passive management and back to active investing since the stock market downturn.
He said: “Investors now believe there is room to add alpha.”
He added that mandates had moved from domestic balanced to global, regional and specialist. “The next trend is asset allocation and alpha transfer,” he said.
– Henry Smith
