Fund flows have been consistently up for the past two months, with both December and January seeing net inflows of more than €6bn, according to BVI, the German fund industry trade body. However, despite this, it is still a slower recovery than this time last year, which in January saw a €13.5bn inflow.
With the general expectation in Germany that interest rates would remain low for a long time, there has been a flurry of interest in asset classes that could beat fixed interest. Of course now that the ECB has indicated it might be likely to raise rates sooner, a flood of fixed interest redemptions might not be too far ahead.
In the meantime, any fund manager offering interest-rate-proof solutions could find themselves in demand. Both our data and the industry numbers indicated that equities remain an increasingly popular asset class.
Another growing area is ETFs, which are continuing their seemingly unstoppable rise in the ranks of beta products.
News Roundup
• Axel Weber, the departing Bundesbank president, reported that Germany was enjoying a “roaring recovery” and forecast that gross domestic product would rise by 2.5 per cent this year, after a 3.6 per cent increase in 2010.
• Angela Merkel’s government has recently been shaken by the departure of the defence minister. Karl-Theodor zu Guttenberg resigned after he was alleged to have plagiarized his PhD thesis, which resulted in pressure from the media, political and academic establishments.
• A quarter of German life insurers are slipping below their minimum solvency rates, according to a report by consultancy groups Bain & Company and Towers Watson.
Hot Topics
What everyone is talking about
• Fixed income – what to do about raising interest rates?
• Europe’s future – the choice between peripheral or core markets
• US economy – is it still the driver of global recovery?
• Ucits – pros and cons
Key points of the four biggest interviews
Head of multi-manager at a financial services provider and asset manager
• Most products in the last 10 years were dead-ends
• Ongoing low interest rates will have drastic consequence
International partner at a specialized consultancy
• Institutional investors are going for larger equity weightings
• Investors remain risk averse
• Ucits IV isn’t always as liquid as people think.
Fund selection unit, private bank
• Mixed views on bonds: AAA will be negative, but lower Investment grade & upper HY will be positive
• Emerging market local currency is still good
• Commodities are overpriced
Head of fund selection, institutional asset manager
• EU support for the peripherals countries will be crucial
• The Ucits wrapper is good, bar some of the side effects
Asset Classes
Emerging Markets
The explosion of political instability in North Africa and its effects on the Middle East has highlighted the true nature of the kind of volatility that emerging markets can suffer. Our interviewees were all surprised and made wary by the amazing speed and impact of the anti-state movements in Libya, Tunisia, Egypt, Bahrain, Saudi Arabia, even China.
In any case, there was concern that the mainstream markets were over-invested and many people believe it is time to look to the smaller, less popular markets for growth.
The three countries that were regularly mentioned were Taiwan, South Korea and Mexico; Taiwan and South Korean because of their strong links to the Chinese markets, Mexico because of its economic strength in the face of political instability.
Eastern Europe
Another area becoming interest again is emerging Europe. In particular Russia is considered undervalued, although fear of political unpredictability remains.
European Equities
Interviewees highlighted a return of confidence in European equity markets. Peripheral economies are carrying some risk, therefore most investors indicated an overweight in core euro markets.
US economy
Macro data for the US markets has allowed investors to be positive on the outlook. The potential of the economy is not to be ignored, but it remains very important to bear in mind the recent debt problems individuals, financial institutions and most importantly the government are carrying.
Both a high unemployment rate and a suffering real estate market limit the positive outlook but also indicate that there will be no inflation spiral.
Fixed Income
The majority of investors in Germany are foreseeing a challenging year for government bonds. However, most investors need to keep a significant part of their portfolio in the asset class and as a consequence are going for short duration to reduce risk; or actively managed funds to increase returns.
Upcoming Challenges
German institutional investors are limited in their ability to invest outside traditional asset classes and have a very conservative approach to risk management, including a high proportion of bond ownership.
Should interest rates be raised in the next months, the government bond overweight might start to look a very risky bet indeed. However, with equities being uncertain, cash offering no interest and most of the gains in credit having already been realised, more niche strategies may become more popular: options strategies, multi-asset funds, volatility trading and so on.
