FRANKFURT — International money managers are reaping new accounts from German pension plans adopting core-satellite investment strategies and outsourcing assets to specialist fixed-income managers.
According to local consultants, non-German firms winning new business include BlackRock International Ltd., Edinburgh; Western Asset Management Co., Pasadena, Calif.; and Capital Group International Ltd., UBS Global Asset Management, Foreign & Colonial Investment Management Ltd., Merrill Lynch Investment Managers Ltd. and Ashmore Investment Management, all of London.
Major pension organizations that appointed specialist fixed-income managers in the last 18 months include the €30 billion ($37 billion) Bayerische Versorgungskammer, Munich, which last year outsourced €700 million in specialist fixed income to four U.S. and U.K. firms and one German money manager; and German energy group E.OnAG, Munich, which last year appointed an external passive manager to run its core European government bond portfolio and specialist active managers to run corporate bonds.
Andre Heimrich, BVK's head of asset management, said the group hopes to outsource more of its bond portfolio. Only around 5% of its fixed-income assets — which comprise 80% of total assets — are managed externally. He would not name the new managers hired or the balanced manager they replaced.
"Our experience in the old world was that most balanced managers did not perform well and for these asset classes we got in specialists as we thought they would have an advantage," he said.
E.On appointed specialist managers after it adopted a core-satellite strategy in the bond portfolio that is part of the firm's €8 billion Master KAG multimanager pension fund, launched last year for its German staff. The fixed-income assets had been managed internally in a balanced portfolio, according to sources. Company officials would not comment on the changes.
The €6.5 billion Nordrheinische Arzteversorgung, Dusseldorf, is believed to have outsourced up to half of its fixed-income portfolio to specialist money managers. Dirk Lipelmeier, general manager at the fund, could not be reached for comment by press time.
To date, large German pension plans have managed most of their fixed-income portfolios internally, and mainly in German government bonds. Those that have outsourced have typically appointed balanced managers that are part of local banks with which their plan sponsor or parent company has an existing relationship.
Now, local pension plans increasingly are investing in corporate and high-yield bonds, emerging market debt, asset-backed securities and collateralized debt obligations, said Mercer's Mr. Crawford.
"It's been a rising trend in the last two years to make passive investments in core government bonds and use an active approach in satellite portfolios," said Torsten Koepke, head of consulting at Feri Institutional Management, Bad Homburg. And non-German firms, with longer track records as specialists, are being appointed to many of these new mandates.
A change in investment regulations in 2002, making it easier for non-German money managers to run assets for local institutions, was the catalyst for the move to core/specialist portfolio constructions, said Claus Heidrich, head of the German branch of F&C Management Ltd., Frankfurt. F&C runs €2 billion in emerging market and corporate bonds for German institutions; Mr. Heidrich would not name any clients.
Of the €360 billion in assets estimated held by German corporate, occupational and public pension plans, up to €252 billion or 70% is invested in fixed income, according to Erik Crawford, senior consultant with Mercer Investment Consulting, Frankfurt.
With such a high allocation to fixed income, pension institutions have been under pressure to generate returns while reducing costs, said Feri's Mr. Koepke.
Corporate plan sponsors will typically allow their external bond manager to invest in a diverse range of instruments through an aggregate account. They are either outsourcing for the first time or appointing specialist money managers to replace incumbent balanced managers.
But according to Mr. Koepke, some German money managers struggle to control the risks inherent in investing in certain classes of debt such as emerging market bonds.
This is where non-German money managers have been able to fill the gap.
Mr. Koepke estimates that foreign money managers currently account for around 10% of mandate wins at the moment. But the volume of new mandates being awarded to non-domestic managers is increasing rapidly, by around 15% a year.
"The German market has woken up to global bonds in the last 18 months," said Alan McKenzie, managing director with BlackRock International in Edinburgh. An increase in the number of international consultants setting up in Germany has also accelerated client interest in new investment approaches, he added.
Emerging market debt specialists Ashmore teamed up with Goldman Sachs Asset Management, London, launch a principal-protected emerging debt product that has sparked some interest among German institutions, said Jerome Booth, head of research at Ashmore.
He believes the bulk of allocations to specialist fixed-income managers still have to be made.
"A lot of institutions have a similar problem and are coming to the same conclusion to take a more diversified approach, resolve their home-country bias and use specialist managers," he said.