‘Small is beautiful’, ‘highly specialised’ and often ‘above average in the generation of alpha’ – these are the kind of phrases that are commonly used by institutional investors in Germany when discussing fund boutiques.
Highly specialised, independent asset managers are becoming increasingly important to investment decision-makers from corporates, trusts, pension schemes and insurance companies. One reason for the triumph of the independent asset manager has been the above-average results of these specialised providers.
However, in Germany there are now several domestic and foreign players from the alternative investment area with Ucits III compliant mutual funds on the market. This trend has been driven partly by the simplified purchase process that a Ucits structure allows. But for the alternative managers, it is also a marketing tool as it gives them a higher level of publicity in the media. So many hedge fund companies are attracted by the benefits of this ‘hedge fund lite’.
In Germany, so-called private label funds are also continuing to exploit the advantages of a retail mutual fund format. These funds are increasingly set up and promoted by houses such as Universal Investment, Hauck & Aufhäuser and AmpegaGerling who specialise in creating a structure that allows smaller boutique houses to reach a wider audience. Institutional investors appreciate the transparency and the regulatory safeguards these products offer. Other regulatory rules such as IFRS, governing the way institutions describe their assets and liabilities, have also encouraged the trend towards the use of mutual funds.
Target group behaviour and manager selection
Many institutional investors are now monitoring the market in Ucits III products very carefully. In the Frankfurt area there are many events, road shows and roundtables put on by independent houses. Looking at the attendees, it becomes clear that the institutional and the retail sector have been coming closer together for years. There is increasing crossover between capital markets products and asset management, especially through the use of commercial products in hedge funds, which are now appearing in the form of regulated mutual funds to increased attention from the traditional asset management industry.
Meanwhile the fund of funds analyst from the traditional industry is increasingly doing the same job as the analyst in the pension fund or foundation. In both segments the qualitative analysis of managers is being strengthened, because increased emphasis on boutiques forces you away from a pure quantitative bias.
The electricity company EnBW offers a good example of the ways in which this market is changing. It has created its own ‘segment master fund’, an internal pooled vehicle which then invests in selected third party products.
All this interest in specialist boutiques and Ucits III strategies is leading to a re-evaluation of the analysis services offered by information providers. Classic rating agencies are working out how to tackle the classification issues as investors demand greater transparency.
Consultants like Mercer or Feri analyse the market while service providers such as Kommalpha monitor trends in structure, products and volume. The German investment association the BVI has also enhanced the information it publishes to support this trend. In addition, the so-called core-satellite approach has accelerated this trend. Mainstream markets can be covered by ETFs, while specialised markets are outsourced to an independent manager who has distinguished themselves in the past with a high alpha.
Marketing and Sales – myth and reality
All that glitters is not gold. Many foreign managers have arrived in the past in the German market, but left again. Fund boutiques, of course, must meet the same regulations as larger houses and for strategic partnerships with distributors they need to reach a certain asset size.
Independent service providers with a special expertise should remember that ‘push marketing’, with an aggressive sales style, is unpopular among German institutional investors and a local presence is important. Hit-and-run strategies are doomed to failure because the average institutional investor in Germany sees long-term business relationships as very important.
‘Keep it simple, stupid’ is a pretty good success formula in the German market. It may sound obvious, but good preliminary research on the German market is essential. And above-average performance is a must. So far as the sales message is concerned, a solution provider is more likely to succeed than a hard-seller.
For German institutional investors, class comes before mass. You can say with confidence that German institutional investors will continue to have an interest in excellent long-only and hedge fund managers. In future, the top performers from abroad will also find that long-term German investors increasingly open their doors to them.