Flossbach von Storch – one of the companies offering wealth management (vermögensverwaltende) funds to the German market – argues that for many clients this is the only product they need.
The recent financial crisis has shaken the world of mixed funds. A recent analysis by Morningstar Germany revealed that only 6 of 81 funds were able to outperform a 50/50 stock-bond-benchmark.
Fund managers thus had to change the recipe of the capital cocktails they offer to clients. They added ingredients to the stock-bond mix and invested in commodites, real estate, hedge and private equity funds. In Germany and Austria a new product line emerged, bringing the distinguished world of the “Vermögensverwaltung”, the wealth management service on offer to wealthy clients, to private investors – in a funds wrapper.
Flossbach von Storch, the Köln-based independent asset manager, is one of the pioneers of “vermögensverwaltende Fonds”, of wealth management funds for private investors. Currently, the firm manages €9bn in client assets, roughly €600m in its wealth management fund range. Gerald Kichler (pictured), the portfolio manager of these products, claims that these funds are the next best thing to the full-blown wealth management that is reserved for the very wealthy: ” These funds are a perfect copy of our wealth management service. The main advantage for clients are clear: they only need one product.”
At the same time, this means more responsibility for the fund managers to avoid drawdowns. Indeed, Kichler carries out active strategies in most asset classes, but most importantly for stocks. “When we talk about portfolio volatility, we mean volatility in stock markets. This is where we can avoid drawbacks.” At Flossbach von Storch defensive stocks with a beta of about 0,6 make it into the stock portfolios.
“Take Nestlé for example. This is no stock that could halve, it has a very solid enterprise and is fiscally healthy.” Low debt ratios thus are a key criterion for stock-picking.
At the same time, FvS has a strategic interest in sizeable convertible bond positions in its funds as well as a significant gold investment.
Currently, Flossbach von Storch offers a fund range of four “vermögensverwaltende Fonds”, ranging from defensive to growth positioning, depending on the maximum stock equity exposure that clients want to have. Since the inception in late 2007, prior to the Lehman collapse, the funds have gained between 15 and 20 percent, whereas the relevant benchmarks are still in the red. As risk aversion remains high the funds aim to keep drawdowns shallow. This characteristic of lower risk has fuelled interest by German investors, causing a boom for mixed funds, especially the more defensive ones. In Austria and Germany, in five of the past six years the asset class has garnered net new assets, even as the overall public fund market shrank, data from the local industry groups show.
But stocks remain an important yield component for Kichler. “Clients like endowments face a investment crisis. They cannot earn any significant yield on traditional fixed income assets.” This investment crisis – the “Anlagenotstand” as Kichler puts it – is already going to the next level, the German fund manager argues. The yield spreads on many corporate bonds have been driven to zero, making the asset class “difficult to invest in”. Stocks with relatively high dividend rates offer an alternative and at the same time could grow even if economic growth remains weak.
Even though stocks are generally attractive, the fund manager is not fond of all stocks. “You have to differentiate between good and bad ones.” For quality stocks like Nestlé, Kichler sees a bright future, with investors pouring money into these companies to avoid low yields elsewhere. “A multiple expansion is ahead of us, as more liquidity flows into this asset class.”
At Flossbach von Storch, inflation is also a key concern. The massive expansion of central bank activities and the buoyant real estate market in Germany might bring inflation rates of three to four percent. Thus real assets such as stocks and Gold are strategic positions in the funds. “We sustain a gold ratio of 15 to 20 percent in the funds. It is a hedge against reckless monetary policy.” The gold is held physicly at Flossbach von Storch to avoid counterparty risk in times of crises.
But inflation has remained muted for most of the expansionary phase of monetary policy, as banks remain bottlenecks for liquidity. Is inflation thus a concern in the short term? “Art, vintage cars and luxury real estate have all doubled in price. This, too, is one type of inflation.” Kichler sees more significant assets flowing into this area as yields remain suppressed.
But Inflation is an even greater longer-term concern for Kichler. “It is just not possible that governments can save themselves out of this crisis, they will resort to inflation to get the fiscal crisis under control.”