Why European asset owners favour funds

Leading institutional investors in Europe have stressed the benefits of mutual funds over direct investments for the expertise, transparency and cost effectiveness they provide, a forum heard.

This was especially true in less liquid markets such as in Asia, suggested participants at a global distribution conference hosted by the Association of the Luxembourg Fund Industry [Alfi] in Luxembourg this week.

“Since the financial crisis, we have had to go further afield in the credit space so our portfolio now looks quite different,” noted Michael Pilz, head of fixed income at the $45 billion German insurer Versicherungskammer Bayern (VKB).

This largely means buying products from external managers via segregated accounts, he explained, especially for Asian allocations for which it outsources management of all fixed income investments and the majority of equity, too.

Raimund Seeholzer, a partner at LGT Capital Partners, which runs more than $50 billion in alternatives mandates for a range of endowment and insurance clients, sees the benefits in less liquid markets, such as emerging market debt and high yield.

“In the less liquid space the market has become more complex, so there is a real need for expert managers to do allocations well,” he said.

Seeholzer and Pilz both stressed the benefits of outsourcing servicing for these more demanding, less liquid assets. But both also highlighted an important caveat.

“It needs to support our risk management, which we do in-house, so we need the right level of control and governance over the assets,” stated Seeholzer. “This is one reason for our preference for segregated accounts.”

Pilz added: “Investing in a fund or security [via a listed fund] I get the fully diversified portfolio as well as the administrative benefits. But we need the right level of transparency – the documentation and reporting – having access to what is happening in those funds is key."

This latter point, he stressed, was where some funds can fall down. “Sovlency II, in particular, makes it hard to check that you have the right level of transparency, and this can create trouble with investing in mutual funds,” he explained.

Pilz pointed out that VKB awards large enough mandates to insist on segregated accounts, which is something that he argued the firm’s investors appreciate, knowing that funds are not offered to other investors and that assets are not co-mingled either.

He said he would always likely favour using a regulated onshore fund because he felt the additional level of fees was justified by the additional risk and control benefits he received.

Seeholzer noted that growing investor needs around transparency meant that the Alternative Investment Fund Managers Directive (AIFMD) had been no bad thing.

“It will be make it easier for institutional investors to get access to alternatives,” he said, "because they would finally be able to stop asking, ‘Am I allowed to invest in this asset’, and start saying, ‘Do I want to invest in it?’”