Investors’ interest in finding fund solutions remains unwavering. In Germany, the level of assets managed in investment funds has risen every year since 2011: from €1.8 trillion to €2.8 trillion by the end of 2016, according to German Investment and Asset Management Association (BVI) investment statistics. This trend is likely to continue in the light of the ongoing low-interest-rate environment. In the last two years alone, the German investment sector has seen a net inflow of €278 billion in funds. Of this total, €217 billion was invested in special funds and €79 billion in mutual funds. Trend Number 1: At the end of last year, more than half of the assets, namely €1.48 trillion, were invested in the special funds reserved exclusively for institutional investors. Nearly two-thirds, €878 billion, were attributable to pension scheme providers, that is: insurance companies and retirement savings institutions, such as pension funds and occupational retirement funds. However, the ongoing high level of funds flowing into pension schemes also poses problems - and these are putting investors under considerable pressure: While the flow of funds into old-age provision schemes isn’t expected to peak for another ten to 15 years, the portfolio of safe, high-interest investments - mostly government bonds in industrial nations – is maturing.
These latter investments (still) cover the high guaranteed interest rates of the past: For example, those of life insurance policies, which – at the peak between July 1994 and July 2000 - promised annual interest of four percent. These days, none of the conventional fixed interest bonds promise such a return. On the contrary, newly issued government bonds from ‘safe’ countries, such as Germany, Japan and Luxembourg, with maturities of up to ten years, are currently offering no interest at all, or sometimes even negative interest.
The question is: How can this gap be closed? This is where Trend Number 2 comes into play: Investors are hoping alternative investments (AI) will offer a solution to the dilemma. According to a survey conducted by the Bundesverband Alternative Investments (German Association for Alternative Investments, BAI), the main reasons given for selecting AI are the hope for “returns” (cited by 96 percent of respondents) and "diversification" (94 percent). The demand among institutional investors for additional asset classes is an attempt to ease the pressure during this low-interest-rate period for which, in Europe at least, there is still no end in sight. These additional classes are divided into “conventional” investments - such as high-yield bonds and emerging market bonds, as well as absolute-return and multi-asset products - and "alternative" investments. The latter include investments in private equity, real estate, infrastructure projects and loans. In addition to these, sustainability is also gaining in importance. "In Scandinavia, the Netherlands and France, it is already a legal requirement that sustainability criteria are considered," explains Carl Berthold, Portfolio Manager at JAR Capital, an investment boutique specialising in sustainability bonds. What’s more, pressure by institutional investors to make companies decarbonise is creating additional momentum. The best example of this is the announcement by Allianz in November 2015 that it will no longer invest in mining and energy companies that generate more than 30 percent of their revenues from coal.
Special funds have always provided institutional investors with reliable investment performanceMarkus Neubauer ,
Managing Director Universal-Investment
Whether the investments are conventional or alternative, what is most important for institutional investors is a reliable long-term return. "According to our calculations, special funds have always provided reliable investment performance," observes Markus Neubauer, Managing Director of Universal-Investment. The average returns on special funds calculated for two, three, five and ten years have been about four percent per annum. What is interesting, adds Neubauer, is that the make-up of the portfolios has changed over the years and is shifting towards more risky investments. The proportion invested in equities rose from around 23 percent to about 32 percent between March 2012 and January 2017, while that of bonds sank from 55 percent to 45 percent. Trend Number 3: There has also been a significant shift in the world of bonds. While there has been a fall in both government bonds from developed nations and covered bonds, corporate bonds (now constituting almost one-third of the bond sector) and completely new bond types, such as bonded loans, have increased. All in all, the last one and half decades have seen a significant increase in the number of investment options available. In 1999, institutional investors could only choose between direct holdings in bonds (about 87 percent), equities (seven percent) and real estate (six percent). These days, there are a multitude of asset classes – ranging from timber to hedge funds and from to convertible bonds to real estate funds. Interest in real estate, in particular, is greater than ever before: Net capital inflow into open-ended real estate funds more than doubled to €4.6 billion at the end of January 2017 compared to the previous year’s period.
The numbers speak for themselves: If institutional investors are to meet their long-term requirements and commitments, they need reliable returns. Since conventional government bonds are no longer providing such returns, investors are diversifying into new and alternative investments and investment vehicles. And more and more of them are turning to mutual funds. While mutual funds started life as a product for retail investors, they have also long been important to institutional investors. An analysis of the net capital inflow into mutual funds since 2006 - based on BVI (German Fund Association) figures - confirms this. In 2015 alone, more than one third of the net inflows - €26 billion of the total €72 billion – came from institutional investors. Mutual funds are likely to become even more attractive in the years ahead. Even if passive investment products - so-called Exchange-Traded Funds (ETFs) - represent a major challenge, and even though the BVI figures show that ETFs accounted for about two-thirds of equity funds last year, this is not the case with mixed funds and bond funds. Active fund management dominates in the mixed fund market, and it is a similar with bond funds. Mixed funds attracted the highest level of investment, with €38.6 billion in 2015, followed by equity funds in second place with about €21 billion, while bond funds took third place with a €6.3 billion share. The ongoing pressure to generate returns is likely to ensure that interest in mutual funds continues to rise in the months to come, especially among institutional investors.
The reasons why institutional investors are putting more money into mutual funds are varied and depend on the target group. The appeal of mutual funds is growing, in particular among small and medium-sized investors, including many foundations, family offices and medium-sized companies, as well as among consultants and fund of fund managers. However, institutional investors such as pension funds are also taking a growing interest in the investment opportunities offered by mutual funds, especially when dealing with special issues related to diversification. "Even institutional investors take an increased interest in things such as gold in periods of low interest rates," says Dr Joachim Berlenbach, fund adviser for the Earth Gold Fund UI. Many investors are taking an increasing interest in alternative return opportunities because the conventional investment classes are yielding less and less. Those investing moderate volumes often find that the amount they want to invest is too small for a single mandate. However, just like the institutional investors, they still need to keep their portfolios diverse, spread their investments across different asset classes and remain flexible. As such, different mutual funds are an ideal option in the portfolio strategy. Universal-Investment can also accommodate specific client wishes related to such shifts in portfolio strategy – be it a change of managers, the desire for a simple reporting solution or a cost-efficient investment via an institutional share class.
Universal-Investment spoke to Andreas Hausladen, Head of Private Label Business Development at Universal-Investment, about the consolidation of the fund industry, conflicts of interest and the growing professionalism of the industry.
Universal-Investment: Mr Hausladen, is the private label fund market become smaller and more consolidated?
Hausladen: We are currently experiencing countercyclical momentum and a longer-term consolidation of the industry. I say countercyclical because despite – or perhaps precisely because of – the turbulence on the stock markets, the start-up business with new providers of private label funds remains strong. Given the situation, with many banks currently in crisis, it’s easy to understand the incentive for talented people from these institutions to set up independently. On the other hand, consolidation is taking place within fund administration, although this is less a result of mergers or insolvencies than of the concentration of fund-launches and net inflows on fewer providers and products.
Universal-Investment: Who benefits from this consolidation?
Hausladen: The business is increasingly focusing on just a few providers, like Universal-Investment, who can afford the necessary high investment in know-how and technology. For this reason, the sustainability and independence of the business model of an investment management company plays an increasingly important role in discussions with asset managers. Questions arise about the consistency of the business model and conflicts of interest, but also about the range of services and level of professionalism offered, or whether the IT of the investment management company is up-to-date.
Universal-Investment: Have asset managers who are clients of yours become more critical?
Hausladen: I would rather speak of a growing professionalism. The managers are primarily seeking a strong or, respectively, a strategic partner. That is why they ask more and more detailed questions - which is a good thing and has long been common practice with institutional investors. Are there conflicts of interest because the investment management company has its own products? Are depositary and administration separate, as required by law? Are there hidden costs and cross-subsidies? And what is the quality of the trading? Such questions are also being asked more and more often at a regulatory level, and regulatory developments are clearly moving towards more transparency.
Consultants and fund of fund managers are also happy to include mutual funds in their concepts. Years of experience working with these groups have revealed that they are keen to find special investment approaches and include new asset classes. They have high expectations of investment managers: Consultants and fund of fund managers prefer to build personal relationships with potentially interesting asset managers, expect them to complete comprehensive due diligence questionnaires and put them through qualitative and quantitative filters before they will consider using them for investments. Universal-Investment can support the investors with their very diverse requirements. "We cover almost all asset classes and investment styles with the mutual funds on our platform," says Katja Müller, Head of Sales & Relationship Management. This is manifest in Universal-Investment’s success to date: Since 1970, this Frankfurt-based company has successfully launched mutual funds with external partners that cover all asset classes and embrace diverse strategies. As of the end of January 2017, the German and Luxembourg platforms included almost 550 private label funds with a total volume of more than €24 billion.
Universal-Investment seeks the best possible investment solutions to its investors’ wishes, from ‘plain vanilla’ equity or bond funds through to mixed funds, specialised investment products for individual markets, themes or styles, and sophisticated multi-asset funds. Working with asset managers, we implement and develop fund solutions which serve as useful portfolio components for institutional investors, fund of fund managers or consultants.
It is always necessary to bear regulatory and legal requirements in mind when tailoring private label funds to the needs of the investors, as these have increased significantly in recent years. Here, Universal-Investment is able to provide competent advice to fund partners and investors in all matters. The growing regulatory requirements and resulting demands on fund initiators necessitate close dialogue with the investment management company, according to Andreas Hausladen, Head of Private Label Business Development at Universal-Investment. "That is why they pose more and more questions - which is a good thing and has long been common practice with institutional investors,” he observes.
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Demand for real assets remains high across all investor groupsWilhelm Gold
Universal -Investment is also accommodating growing demands among institutional investors and fund initiators for alternative investment solutions. "Many fund initiators who, until now, have focused strongly on the securities sector, find they are receiving more and more queries from their clients about investments offering higher returns in real assets," says Wilhelm Gold, Head of Real Asset Managers (RAM) Division, which was founded in 2015. At present, RAM is working on eleven mandates with a target volume of around €3 billion, in the areas of renewable energy, infrastructure, forestry and shipping loans. "New additions are the asset classes loans, i.e. corporate loans, and private equity." In addition, RAM is also managing four renewable energy mandates. Gold is also expecting additional momentum from the "Reserved Alternative Investment Fund (RAIF)". As an alternative investment fund, it requires no authorisation under Luxembourg law. What is special about this is that alternative Investment Managers (AIFMs) who are already regulated can launch new funds (RAIF) which then don’t require supplementary supervision. "The ongoing high demand for real assets across all investor groups, except among private investors, confirms our decision to gear ourselves more strongly towards such mandates," Gold concludes. Whether equities, bonds or real assets: The comprehensive range of private label funds on the Universal-Investment platform accommodates the interests of institutional investors, fund of fund managers and consultants looking for returns, diversification and liquidity. Fund initiators can access new markets with a stronger focus on institutional investors.
Date of issue: 6/9/2017
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