Thomas Richter, chief executive of BVI – the German Investment Funds Association – reflects on how the country’s asset management industry handled the pandemic in 2020.
2020 was an extraordinary year for the German fund market. Not only did funds record the third-best sales year despite the corona crisis, they also posted record holdings of €3,850 billion, underscoring the importance of funds for retirement provisions and the benefits of stable distribution channels during market turmoil.
The German fund industry’s growth trend continued unabated. New business of retail funds and Spezialfonds for institutional investors amounted to €126 billion by year end. Sustainable retail funds in particular recorded inflows of €20.6 billion net. As a result, sustainable funds contributed almost half of the retail fund segment’s new business in 2020. Germany remains the largest fund market in Europe.
According to the European Central Bank, it accounts for 23% of all fund assets held by investors in Europe, followed by France and the UK with 14% each.
Preventing panic
The strong performance has a couple of reasons. First, retail investors did not panic when the markets temporarily slumped in March last year. This may partly be due to the simple fact that the quick recovery of the stock markets did not leave enough time for fire sales. But, more importantly, sales teams and commission-based financial advisers obviously managed to calm down their retail clients, preventing a panic-driven reaction. This, combined with a favourable climate for funds created by record low interest rates, encouraged private households in Germany to invest €5.8 billion in investment funds in the first quarter 2020, whilst in the UK they withdraw €8.8 billion and in the Netherlands €2 billion. This is certainly due to the ban on commissions in both countries.
In the second quarter, net sales in Germany and Europe already surpassed pre-Covid figures. In Spezialfonds, new business declined temporarily; after the best start to a first quarter since 2015, institutional investors sold a small number of fund units in April and May due to a need for liquidity. But here, again, the signs turned positive from June onwards. Fortunately, the slowdown in new business remained a temporary dip, which then turned into a rapid recovery.
Liquidity management
The fact that no fund had to be closed due to outflows of liquidity also had a calming effect on the fund market. Given this, strict and efficient fund liquidity management was crucial for the resilience of the fund market last year. Germany is a pioneer when it comes to liquidity management tools, e.g. by applying the stricter rules of the AIFM Directive on liquidity management to Ucits funds since 2013. Guidelines ensure effective processes (e.g. liquidity stress tests) for dealing with liquidity bottlenecks. And last but not least, open-end real estate funds are benefiting from the redemption period which was introduced in 2014 and has already proven its ability to prevent unmanageable outflows. Since March 2020, the German Investment Code (KAGB) includes swing pricing, gating, and redemption periods for securities funds as additional liquidity management tools, which have been smoothly implemented during the year. Now the German fund market has all necessary liquidity management tools in place to handle the next crises.
* By Thomas Richter, CEO of the German Investment Funds Association (BVI).
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