Regulation gives rise to new product field
Regulation of the investment sector has increased sharply in the wake of the financial crisis. In 2013, the EU’s AIFM Directive was transposed into German law via a new Investment Code (Kapitalanlagegesetzbuch – KAGB), marking the start of a new era for the financial industry. Union Investment took advantage of this sea change to develop an additional product field aimed at institutional investors.
“It’s not only the growing regulatory requirements that make service mandates an increasingly attractive option for institutional investors,” says Dr. Christoph Schumacher, a member of the management team at Union Investment Institutional Property GmbH. “Separating fund administration and portfolio management gives investors access to more diverse fund manager talent, as well as enabling them to respond more easily to changing conditions. Additional benefits can be gained by tailoring mandates to specific needs.”
Splitting administrative and investment management activities allows investors to leverage the specialist skills of individual providers. Highly diversified portfolios comprising alternative real assets can be covered by specialised Service KVG providers. A further advantage is that replacing the portfolio manager is much faster. The complex business of transferring administration tasks is avoided and no transaction costs are incurred; the existing holdings remain with the Service KVG and are taken over by the new fund manager within the existing structure.
A broad range of diverse solutions
Union Investment has been offering a Service KVG function since 2011, with strategic development of the new business area getting under way in 2013. “Investors from a wide variety of backgrounds benefit from the efficiency of our administrative infrastructure and the associated economies of scale,” comments Dr. Christoph Schumacher. Customers can select services on a modular basis, tailoring them to their individual requirements. The nine Service KVG mandates and funds of funds covering assets of around EUR 3.0 billion currently being handled by Union Investment for pension funds, banks and insurance companies are based on three models: one or several asset managers working on the mandate of an institutional investor, inclusion of portfolios managed by third-party fund managers, and using a mandate as a pooling vehicle. The latter model involves bringing together direct and indirect real estate investments in a newly established fund of funds. The detailed design of the models depends on the individual requirements and objectives of the respective investor.
In the coming years, Union Investment intends to further expand its institutional real estate business on the back of tougher regulation. “New regulatory requirements relating to risk management by institutional investors are a particular issue – which also affects us as professional real estate managers,” explains Dr. Schumacher. “Building on the Group’s long experience in risk management, we intend to expand our solutions to meet this need.”