May 4, 2017

Fund Manager Briefing:  Dr. Bert Flossbach–Flossbach von Storch, a German Multi-Asset Boutique

by Detlef Glow

The German asset manager Flossbach von Storch (FvS) was one of the major winners of the group awards during the Thomson Reuters Lipper Fund Awards 2017; the company not only won the mixed-asset large category Dr. Bert Flossbach - Flossbach von Storch (FvS) Source: Flossbach von Storchfor Europe, but it also won this award for Germany, Austria, and Switzerland. In addition, it was a topic of interest that FvS has moved from the small-asset manager category to the large-asset manager category in 2017. FvS showed an impressive growth story over the past eight years, mainly driven by its flagship product–Flossbach von Storch Multiple Opportunities R (LU0323578657).

During a meeting in Cologne, where FvS is based, I had the chance to speak with Dr. Bert Flossbach–the cofounder, a member of the board, and a portfolio manager at FvS–about possible limitations on the capacity of FvS Multiple Opportunities R and his plans for future growth of the company.

Trying to win back risk averse investors

Asked about his plans for the next ten years, Dr. Flossbach answered that it is common knowledge that Germans are suffering from the low interest rate environment. This is because they mainly own cash, savings accounts, and government bonds as well as life insurance and pension plans with a guaranteed return. He added that it is sad to see all these investors sitting on the sidelines waiting for increasing rates, while equities especially are delivering good returns. In this regard Dr. Flossbach pointed out that German investors are risk averse; they lost a lot of money when the tech bubble burst and during the financial crisis in 2008, so it will be hard to win them back as equity investors.

Multi-asset funds can still grow in Europe

Therefore, FvS wants to offer these investors multi-asset products that look attractive to them from a risk/return perspective and that can help them meet their investment goals. That said, he mentioned that even though it seems everybody is speaking about multi-asset funds, the retail market for mutual funds in Germany has barely been tapped and therefore offers a lot of opportunity for growth. Besides growing in the German-speaking markets, he eyes Belgium, the Netherlands, and Luxembourg as possible markets, since they are quite close to Germany and can be developed in parallel to the German-speaking markets. In addition, FvS recently launched its first project with a distribution partner in Spain to grow the footprint of FvS.

FvS committed to German market

Dr. Flossbach said he could imagine that FvS would be able to gather around 0.10% of the overall global liquid assets if its products and service quality were further appreciated by investors. Taking today’s valuations into account, this would equal somewhere around 100 billion euros in assets under management. Even as the company thinks big and implements an international distribution strategy for its products, its focus will stay on Germany.

Capacity not a concern for FvS

Since FvS Multiple Opportunities R already holds around 11.8 billion euros in assets under management (taking all share classes into account), on the day of our meeting I asked Dr. Flossbach if this size is still easily managed and whether he sees limitations on the capacity of the fund. He replied that managing an even larger fund could be done without jeopardizing its edge. He added that this question should rather be asked of other fund promoters, mainly in the ETF segment, since they have to cope with much higher assets under management in sometimes comparably small market segments.

Graph 1: Percentage Growth of Flossbach von Storch Multiple Opportunities R, 2012-YTD 2017 (calculated in euros)

Flossbach von Storch (FvS) Multiple Opportunities

Source: Thomson Reuters Lipper

With regard to FvS Multiple Opportunities R Dr. Flossbach said that the assets under management have to be viewed in the context of the investment universe of the fund; for FvS Multiple Opportunities R this would be global bonds and equities as well as gold and cash. He explained that the global equity market has a size of around 100 trillion euros, while the global bond market has a size of 45 trillion euros. This means an asset manager who has 1.5 trillion euros in assets under management holds somewhere around 1% of the global assets. FvS Multiple Opportunities R, with its 11 billion euros of assets under management represents roughly 0.01% of the market size of the investment universe. Dr. Flossbach made clear that he doesn’t see any reason to limit the assets under management of the FvS funds, as long as FvS can establish an asset allocation that delivers to the investor an attractive return after costs and inflation. In addition, he mentioned that FvS is, despite the fact that it was listed as a large asset manager at the Lipper Fund Awards 2017, still an investment boutique and is quite small compared to the big players in the industry.

Graph 2: Aggregated Assets Under Management of Flossbach von Storch Multiple Opportunities R, 2012-YTD 2017 (in billions of euros)

 

Flossbach von Storch (FvS) Multiple Opportunities

Source: Thomson Reuters Lipper

I asked Dr. Flossbach if he already faces restrictions in the bond sector. He cited one example, namely bonds that are issued in small quantities. But these are rather the exception, as the bond markets offer enough opportunities to manage the bond portfolio of the fund. Last January, a position in Mexican government bonds was taken. Dr. Flossbach also said FvS Multiple Opportunities R started to invest in liquid subordinated bonds last year, since these securities showed a good risk/return profile without any capacity issues. He said that these kinds of bonds can normally be sold only step by step and not with a single-order ticket. From his point of view it could also be an advantage if impatient portfolio managers are forced to liquidate positions in small steps, since that may make them think twice about their decision and the possible positive and negative impacts on the performance of the portfolio. If FvS faced a market crash, it would have losses in its portfolio, but on the other hand, such a negative market event would offer good opportunities to buy the respective securities at lower prices.

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