FRANKFURT, Germany A pension platform originally launched to help German companies bridge the gap between domestic and international accounting rules has been fueling business for asset managers.
This platform known as a contractual trust agreement, or CTA now accounts for as much as e60 billion ($88 billion) in German corporate pension assets, according to estimates by consultants and asset managers. The majority of that money is managed by German-based asset managers such as Allianz Global Investors, Munich, albeit with the help of U.S. subsidiaries. Deutsche Asset Management and Metzler Asset Management GmbH, both in Frankfurt, are other major players.
But more U.S.-based managers are taking a bite out of their German counterparts dominance, particularly as corporate pension executives increasingly turn to high-yield fixed-income, global equity and alternative investment strategies to boost returns. Goldman Sachs Asset Management, JPMorgan Asset Management and BlackRock Inc., all in New York, are carving out a sizable chunk of the German CTA business, consultants said.
Over the next year, I think many will invest in more alternatives, said Herwig Kinzler, head of investment consulting for Mercer Deutschland GmbH in Frankfurt. Thats where theyre most likely to maximize returns. Mercer advises 15 CTA clients with total assets of about e25 billion.
Until CTAs were introduced in the late 1990s, most companies accounted for their pension liabilities through a book-reserve system, which is backed by company-owned assets. While the majority of about e400 billion in German corporate pension obligations still falls under the book-reserve system, consultants estimate between half and two-thirds of Germanys listed companies have set up CTAs. While some are fully funded, many carry deficits and will be injected with more capital in the next several years.
When (companies) set up a CTA, theyre much more aware of the pension problems and how to fund the pension liabilities in the right way. They make better asset manager decisions and they monitor them better, said Raimun Rhiel, worldwide partner at Mercer, which advises about 15 clients on CTA portfolios with total assets of about e25 billion. In principle, that increases the returns of those CTAs and drives more investments.
Turning to LDI
As CTA sponsors have gained knowledge on issues such as risk management, asset allocation and asset/liability modeling, some are turning to liability-driven investment strategies to better protect against market volatility.
Among them is E.ON AG, Dusseldorf, which transferred e5.1 billion into a CTA in 2006. Earlier this year, company officials appointed Goldman Sachs to design and implement an LDI strategy. Specific allocation decisions have not been made. The money was added as a cash injection from the companys reserves.
Long-dated bonds will play an important role, but the portfolio will also include return-enhancing strategies, possibly including hedge funds of funds, said Verena Volpert, E.ONs senior vice president of finance.
We want to have a long-term perspective, Ms. Volpert said in a telephone interview. As part of our risk budgeting, we are taking into account many factors such as interest rates, inflation and even longevity. This is something we havent done in an LDI framework before.
Axel Hoerger, Frankfurt-based managing director and head of Germany and Austria for GSAM, said CTA assets under management at GSAM have climbed to $3.5 billion as of Sept. 30, from about $1 billion at year-end 2005.
There is a certain degree of depth in the way that (corporate pension sponsors) are rethinking asset-liability models, said Mr. Hoerger, whose firm has about $21 billion in total assets under management in Germany. The result is pretty mixed. Some have 30% and sometimes up to 50% in equities, while others approach a pure LDI (strategy).
The current volatility in the global stock market might help to push corporate plan sponsors into alternatives at a faster pace, asset managers said. More investors are gaining exposure to hedge funds, mainly through funds of funds, and to a lesser extent, moving into private equity.
It depends on the beta movement of the existing asset allocation and the clients risk appetite, Mr. Hoerger said. There is an increasing tendency to replace part of the equity beta with alternatives, as they can seem more attractive when comparing the total volatility of the portfolio.
However, fixed income still dominates most corporate pension CTA portfolios. For example, about 90% of Deutsche Bank AGs own CTA is invested in fixed income, said Georg Schuh, chief investment officer for the e5.8 billion CTA.
While it is not a pure LDI concept, it comes very close to it, said Mr. Schuh, also managing director and institutional chief investment officer for Deutsche Asset Management in Frankfurt.
The remainder of the portfolio, implemented in December 2002, is invested in hedge funds, commodities, real estate, equities and cash. Fund executives also decided to implement an interest rate hedging overlay in 2005. The following year, they continued to further protect the portfolio with an inflation hedging overlay that covered the majority of the CTAs assets. Deutsche Asset Management manages almost the entire portfolio. In the year ended Oct. 31, the CTA returned 240 basis points above a custom benchmark.
Mostly fixed income
At BlackRock, about 75% of the $6 billion in total institutional assets under management in Germany are invested in fixed-income strategies, including corporate and government bonds, high yield and emerging market debt. Five years ago, the firm had about $200 million in assets under management. While BlackRock does not separate CTA assets from other assets, company executives said the pension vehicle has been one of several key contributors to the businesss growth in the past two to three years. Other factors contributing to the growth in assets under management include merger activities and expansion in other areas of the German institutional business.
Fixed income is our mainstay, said Steven Bayly, managing director and head of institutional business at BlackRock in Frankfurt. Having said that, however, we are getting a lot more interest for equity and alternatives. This is an area were planning to ramp up. We see a lot of potential to expand in Germany.
CTAs were introduced because under the book-reserve system, pension assets and liabilities were not listed separately on a companys balance sheet, which was considered at odds with international accounting rules. The CTA was introduced as a way to allow German companies to better comply with international accounting standards while still maintaining the tax advantages of a book-reserve system.
A CTA is basically an accounting vehicle, and what you do with the CTA depends on who you are and what your objective is, said James Dilworth, chief executive officer for Europe, the Middle East and Africa at Morgan Stanley Investment Management based in London. He formerly was head of Germany for GSAM.
Because many companies have built up a substantial cash reserve and put it into a CTA, it lends itself to a more efficient portfolio management approach, Mr. Dilworth said. He declined to specify how much MSIM manages in CTA assets but said the firm is building its institutional business in Germany, and CTA clients are an important feature.
Its a great market, Mr. Dilworth added. Theres a lot happening there, and its becoming a more and more sophisticated market.
CTAs now account for about 65% of Allianz Global Investors institutional business, said Tobias Pross, CEO of Allianz Pension Partners GmbH, the German division of AGI, which had e230 billion in retail and institutional assets under management as of Sept. 30. Strategically, (the CTA market) is one of the most important in the pensions market for AGI, and will continue to be for the next five years, Mr. Pross added.