Germany faces pooled fund problems

The apparent health of the German fund industry belies a number of serious problems, argues Simon-Kucher & Partners’ Jens Baumgarten.

Germany’s fund industry appears to be in a healthy condition. Domestic investors put €3.13bn net new money into portfolios last year, mainly in equity and mixed products, and withdrew heavily from cash funds.

They ranked fourth in terms of European appetite for pooled investing, says Lipper. Germany’s fund industry association Bundesverband Investment und Asset Management was justifiably satisfied at year’s end.

But pure statistics mask problems that German and, more broadly, European fund managers will have to tackle in coming years, says Jens Baumgarten, who heads the asset management unit of strategy and marketing consultant Simon-Kucher & Partners.

The first is managers must change how they design and think about their fund products. This is necessary because largely as a result of the crisis, investors, the investment climate and asset manager competitors have all changed.

Baumgarten says ‘pushing’ products into market, a strategy that worked smoothly in capital markets supportive of most asset classes pre-crisis, will not work anymore.

“Before, if managers came up with a new product and gave it a sexy title, it was more or less automatically sold,” he says. “That kind of dynamic will not be true now.”

Selective trend rise

Investors now are more selective and cautious in analysing what the value promise of that fund is, and how it would fit into their investment strategy. “The trend is becoming more selective and specific about why a product is good. So the issue is not only about the product itself, but about how it is communicated and positioned,” Baumgarten says. This applies especially to the mass retail segments and, equally, to the upper end of the retail investor market – family offices and private banks, for example.

He sets out the main tasks for asset managers, in terms of designing and positioning their products. Identify your key strengths are when providing funds, he says. Strengths may involve a product’s design or its performance.

It can also be in marketing it and supporting it post-sale, or the investment process or communication underlying it.

Identify and satisfy an investor’s needs with a fund and explain how your product does this. Given a diversity of needs, he says, “be willing to offer a broad suite of products, as Deutsche Bank does, for example.”

Baumgarten expects the reduction in the number of funds that has already begun at some large groups to continue, as managers realise they must deliver high-quality products and not try to ‘dance at too many weddings’ – or be all things to all people.

However, he adds that niche boutiques capitalising on their strengths (Carmignac is exemplary here) may provide new funds at the same time. While the financial crisis might have been the market change that precipitated challenges for the active industry, ETFs were the dramatic change to the landscape of products.

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