The apparent health of the German fund industry belies a number of serious problems, argues Simon-Kucher & Partners' Jens Baumgarten.
Justifying how active management adds value over passive funds will be crucial in the face of German investor scepticism towards active management, caused partly by its generally disappointing performance in the crisis and before it. The average equity fund managed from within Germany lost 4.7% in the decade to 31 December 2010, compared with a 7.6% loss from MSCI World – both in euro terms – according to Morningstar.
Baumgarten says: “Investors all too often found ‘economy class’ service was actually better than in ‘business’ or ‘first’ class. If you look at an ETF and comparable actively managed fund, the actively managed fund was often below the ETF in terms of performance, so a cheaper product gave you a better return.
“If you had the actively managed fund in ‘business class’, you were wondering why the people behind you were getting better product performance.”
It is not the end of actively managed portfolios, in his view, but active managers “must understand and then communicate what they can do well”. For some, this might be certain asset classes, such as European and German mid-cap funds. For others, more structured solutions, such as total return and target funds, better support clients’ retirement and savings goals.
“The fundamental disconnect over the past couple of years has been managers coming up with a smart product, then pushing it into the market without thinking how it could serve investor needs. That is a key challenge from the product portfolio side,” he says.
Some managers have been “brave enough” to launch both active and passive funds for different investor needs, possibly with investors paying for the advice about allocation, even if cheaper products such as ETFs were ultimately used to do this.
From a business perspective, the subsequent question is about the level, and source, of managers’ fee income.