Open-ended fund managers optimistic, distribution less so

Berlin-based rating agency Scope has just published its annual Rating Review for the German open-ended funds sector. It concludes that fund initiators and managers are taking a bullish view, while sales and distribution agents are decidedly less optimistic.

Obviously it depends on whether the fund being managed is still in business, rather than being wound down. Nine fund managers provided estimates to Scope about their business prospects; five of them said they expect net positive inflows in 2014. Six firms said they would be investing as much this year as last. Likewise, six companies said they would be launching new fund products in the next three years, including new mutual funds as well as Spezialfonds for institutions, and closed-end funds for private clients.

A much larger total of 91 banks and financial intermediaries who sell the fund products responded to the Scope survey with their views. These were much more sceptical than the fund initiators – 30% described the climate for selling funds as “unsatisfactory”, while more than half found that the funds in their new incarnation (since the introduction of much stricter regulation regarding fungibility, minimum holding periods, etc.) are much less attractive to sell.

Independent sales channels (i.e. not banks) complained about lack of products to sell (more than half the currently available open funds are now exclusively being sold by Sparkassen and Volksbanken – the typical sales outlets for Union Investment and Deka funds, the largest fund managers). New smaller-sized and flexible funds, along with products focused on residential or with a global focus, are what’s seriously missing, Scope heard in its feedback.

Other analysts view the funds industry for German investors to be in rude good health despite the shocks which led to a third of all funds closing down and currently liquidating themselves. According to Stefan Mitropoulos, head of research at Helaba, “The funds still provide the only real possibility for the average private investors to invest in any meaningful way in a diversified real estate portfolio.” Helaba’s own 12-month performance index, the Helaba OIFIndex which tracks nine investable open-ended funds for private investors, shows a return of 2.3%.

Mitropoulos credits the poorish performance of the index with the high level of cash liquidity which the funds are currently carrying, plus further valuation write-downs on difficult assets. Nonetheless, he says, the funds are still returning a risk premium over the 1.5% return available on ten-year government bonds.

Part of the problem for the poor returns on open-ended funds is the high level of cash they are holding, earning very little interest, in the absence of suitable investment opportunities. Some funds are actively putting a brake on new fund inflows until they identify new properties in which to invest. Normally these are ‘core’ properties, and as such properties for which there is the most competition.

Nonetheless, the funds association BVI say that investors are returning to the sector drawn by exposure to real estate and an aversion to the volatility of the stock market. Last year a further net €3.4bn flowed into the sector, a trend which is continuing this year. Three of the four leading fund managers saw a further €700m net inflows in January and February, the latest figures available. All agree that the new regulations will see a slowing down of inward funds this year, as the market digests the implications of the new regulations.

Funds are now turning to Family Offices and occupational pension funds, which are anxious for more real estate exposure, even considering investing in project developments. Two new funds have nonetheless sprung up – the “Leading Cities Invest” from KanAm, which has bought its first Hamburg property, and a fund from SEB Asset Management, which is still in the process of jumping through its legislative hoops at the financial watchdog BaFin.

Meanwhile, the insolvent funds are in the process of liquidating themselves, and will be doing so up until about 2017. According to Mitropoulos, “The funds which are being wound up are under time pressure to sell their assets, which is often only possible by accepting heavy discounts on their respective book values. What this has shown up is the very differing quality of the dissolving funds’ asset portfolios.”

Scope researcher Sonja Knorr added, “Investors in the frozen funds will simply have to accept losses. As the funds are wound up, the best assets are sold first. The further into the process, the worse the quality of the remaing assets in terms of location and occupancy. Investors will only be getting back a fraction of their capital on these ones.”