With its €4 trillion in invested assets, the rich German market is perennially near the top of the list of countries where cross-border fund managers would like to raise assets and distribute funds in. To help managers better understand and prepare for market entry, Brown Brothers Harriman recently hosted a webinar of top experts entitled “Navigating the UCITS Distribution Landscape: Spotlight on Germany,” to provide guidance on the best ways to market and distribute to German investors.
Opening the webinar, Simone Thul, Senior Relationship Manager, Brown Brothers Harriman introduced panelists including Markus Müller, Executive Board Member of the Luxembourg ManCo of German asset manager Flossbach von Storch Cologne, Dr. Oliver Roll, Founder of 4AlphaDrivers/Frankfurt, Björn Ebert, Partner at PwC in Luxembourg, and Killian Lonergan, Head of Distribution Intelligence for Brown Brothers Harriman in Zurich.
As background, Lonergan said there are approximately 14,000 non-local funds authorized to sell in Germany, including over 10,000 UCITS funds and over 3,000 alternative investment funds. He said Germany is consistently in the Top Five markets where foreign asset managers have had success in raising assets for cross-border products, contradicting the notion that German managers are so well entrenched that a foreign firm would be unable to compete. But he also noted that Germany’s 16 states are so different it is important for foreign managers to look across the entire country, not just in the financial capital of Frankfurt.
Approaching the German market, strategically
Müller said the first question an asset manager going into Germany should answer is: “Who are my target investors?” Retail investors, which he described as having a lot of potential because much of their money remains in low-interest bank accounts, prefer asset managers who are full service, are very familiar with the market and have a clear structured plan about how they should react to market events. For institutional investors, on the other hand, past performance and costs are the most important issues. Many of them perform their own asset allocation and for them equity funds are the most attractive at the moment.
Dr. Roll of 4AlphaDrivers, a consultant focussing on asset management and distribution strategy, said that managers need to approach the German market with a specific timeframe in mind, meaning whether the goal is over the short-, medium- or long-term, as well as providing a detailed distribution strategy, which managers sometimes lack. The strategy should be based on the kind of investment expertise the manager brings to the table. “You need to assess the sales potential of your strategy, drilling down to look at what type of investors your firm wants to target over a specific timeframe,” he said.
Roll stressed that despite the difficulties in setting up in Germany, there is a level playing field between boutique managers and larger players: “If you have a good investment strategy, if you have something that peers from Frankfurt, London or Luxembourg can’t offer in terms of expertise and managing money, you have pretty good chances in this market,” he said.
Müller added that the product expertise narrative offered by the manager was crucial as German investors were unlikely to buy a U.S. equity fund from an Asian manager because it’s likely that greater expertise with years of track record similar funds already exist on the market. He said investors are likely to be more interested in an Asian manager’s take on Asian equity funds about which they have specific deep knowledge and experience.
All the panelists stressed the need for managers to have feet on the ground in Germany to help market and coordinate the distribution. “Understanding the market is difficult and getting the right kind of partners in place, experts like consultants or third-party marketers is really key,” Lonergan said.
Müller noted that German investors were open to buying funds based outside of Germany, such as Dublin and Luxembourg-based products. To this point Ebert confirmed that about half of the 14,000 foreign products authorized in Germany are based in Luxembourg.
Ebert raised the topic of tax as one to be understood by all fund managers prior to engaging in their distribution efforts. He noted that managers have to consider taxes from two key perspectives: the product and the investor. Equity funds that produce dividends have withholding taxes to deal with. In addition, for Luxembourg-based funds, there is a 5 basis point tax on funds aimed at retail customers and 1 basis point tax on funds for institutional investors. There are also taxes on the investors holding the funds. He said there are also ways to recoup some of the taxes by excluding portions of dividends from German equities and invoking double tax treaties.
Knowing the German distribution ecosystem
Lonergan said that getting access to the German market often depends on consultant gatekeepers that investors such as pension funds have hired to help with their investment decisions. “You have to know who the important gatekeepers are,” Roll said. For retail investors, consultants can help fashion the brand’s image. For institutions, consultants play an important role, especially on a pan-European distribution approach. They have databases that investors such as pension funds can tap into to assess changes in strategy. So it is important to make sure your funds are feeding data into those databases to be considered as a potential investment, he added.
The other thing that foreign managers entering Germany need to think about, said Thul, is the adoption of a German security identifier. “It’s important for them to have a connection to WM Daten, who allocates the identifier, and to submit data points like the daily NAV and static data information on that fund-level so the connectivity is very important. Managers need to ensure that they also select a service provider who is able to transmit that data point.”
German funds embrace ESG, but beware of labels
Being no different to many other countries, growth in interest and demand by German retail and institutional investors for funds that specialize in environmental, social and governance (ESG) issues continues to soar. The European Union has adopted the Sustainable Finance Disclosure Regulation (SFDR) which requires funds to disclose the adverse impacts of their funds on sustainability, as well as determining if the fund has ESG goals or makes actual sustainable investments.
Lonergan noted that the Bundesverband Deutscher Investmentgesellschaften (BVI), the German fund association, calculated that in the second quarter of 2020, there were €68 billion in sustainable funds and a year later this had grown to €250 billion, nearly 400% growth.
"It’s not only a complex piece of regulation but even more, a business imperative," Ebert said when speaking of SFDR. Investor/client demand significantly increased for sustainable finance products over the last years with further acceleration over the last 6-12 months. One of the entry barriers to this mainstream ESG market is compliance with SFDR, otherwise, no eligible products (Article 8 or 9 of SFDR) can be offered to these (prospective) investors/clients." (See Brown Brothers Harriman’s SFDR deep dive: Sustainable Finance Disclosure Regulation: So Much to Do, So Little Time.)
He noted that firms with funds already in place will have to update their prospectus and other documentation to include ESG and sustainability. Roll added: “It is a very hot political and societal topic and I think the financial industry and the asset manager industry, in particular, have actually really stepped forward in embracing the themes in its product design, in distribution marketing, and maybe even in investment cases.” But he commented that there was a temptation by some to make a cosmetic change by putting ESG labels on funds, and that the industry will have to closely monitor the use of the term.
German election could impact private pensions
Another issue raised was the likely impact on fund managers of the recent German elections, in which the center-left Social Democratic party won the most seats in the Bundestag, pushing out the center-right Christian Democratic party, which has ruled Germany since 2005, under Chancellor Angela Merkel.
Roll said that the change in government leadership when a cabinet is finally decided may bring further reforms to the German pension system. One possibility he mentioned was tax benefits for consumers to increase their contributions to private pension funds. “The fund industry has been waiting for many years for an increase in private pension contributions. It would be good if we see some major changes there,” he said.
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