Fri, 14/08/2009 - 09:10
Head of funds Manfred Schrapler says that as one of the few banks with a dedicated hybrid structuring and trading team, Deutsche Bank is able to use unique risk management techniques to offer innovative risk allocation strategies involving several asset classes. Its latest Ucits III-compliant products include market neutral strategies in both equity and fixed-income spaces with the Zins Strategie and S&P X-Alpha funds.
HW: What is the background to your company and funds?
MS: We are responsible for developing Deutsche Bank's systematically managed mutual funds, as part of the global markets division, which enables us to leverage the structuring and trading expertise of the bank. We have more than 100 different funds linked to the full range of asset classes via alpha and enhanced beta strategies. Currently, we have more than EUR13bn in assets under management.
Key to our success is that most of our funds are based on proprietary trading strategies and are not available to investors anywhere else in liquid, tradable form. These strategies are totally transparent and have a proven track record. Our clients also benefit from the fact that we are part of one of the few investment banks to be a leading player in every major asset class in every region across the world.
The funds are run by investment managers operating under clear risk management and oversight parameters, are Ucits III-compliant and conform to the relevant rules applying to risk diversification. We also offer non-Ucits funds. A large number of our funds can be bought by private and institutional investors in Europe, Asia, Latin America, the Middle East and Africa.
Our fund business was set up in May 2002 and has offices in London, Luxembourg and Hong Kong. We have one of the most experienced fund development teams in the investment banking industry with an excellent track record.
HW: Who are your key service providers?
MS: We only work with internationally-recognised service providers. These include RBC Dexia and State Street Ireland for administration and custody, Ernst & Young as auditor and Linklaters and KPMG as legal and tax advisors. We believe it vital that independent companies are involved in all areas of fund operations such as fund administration, custody, management and audit.
HW: Have there been any recent key events such as fund launches or changes to the management team?
MS: We are constantly working on new initiatives, which most recently include the launch of market neutral strategies in both equity and fixed-income spaces. Our Zins Strategie and S&P X-Alpha funds are part of this initiative.
In the equity space, we also recently launched two Ucits III funds, the CROCI Carbon 100 Euro TR Fund and CROCI Carbon Alpha TR Fund, that provide investors with exposure to a stock portfolio of attractively-valued companies with low greenhouse gas emissions.
A great example of our innovation capabilities was the launch of one of the first market-neutral commodity Ucits III funds, the Commodity Harvest fund, in October 2008.
HW: How and where do you distribute the funds?
MS: The funds are distributed to investors via Deutsche Bank's institutional sales force, as well as the bank's private client business and private wealth management business. Most of our funds are available for public distribution in various jurisdictions and can therefore be also made available through most fund order-routing platforms.
HW: What is your investment process?
MS: For the S&P X-Alpha fund, the aim of the underlying strategy is to generate uncorrelated alpha by exploiting the typical excess return between baskets of stocks with superior valuations and superior earnings growth versus their respective benchmarks in four regions, the US, Europe, Japan and the UK. To do this efficiently, the strategy uses eight diversified value and growth index pairs in the individual regions.
The strategy uses a rules-based, mathematical model that reflects the relative performance between a basket of value and growth indices in comparison with their respective regional equity benchmark indices and targets volatility of eight per cent per year.
The Zins Strategie fund aims to generate returns from simple fixed-income strategies within a low as well as high interest rate environment. It implements a systematic trading strategy with allocations to various interest rate and money-market strategies based on the behaviour of each underlying market. Allocations are primarily based on a trending signal, but a feature is designed to reduce risk when markets are moving violently. The strategy is entirely rules-based and involves no discretion.
The strategy itself consists in a combination of long and short positions in rates and rate spreads across several currencies. The fund can react quickly to changes in these different markets through weekly observations and rebalancing.
HW: How do you generate ideas for your funds?
MS: The strategies for our funds are designed by our extensive structuring and research teams. The structuring teams are recognised as industry leaders in their fields, and our equity team has won numerous awards for its CROCI methodology and structured financial products.
Our commodity team has achieved recognition throughout the industry with groundbreaking products such as the first mean-reversion commodity index, one of the best performing indices in the market every year since 2005, and one of the first indices to use the optimum yield strategy.
Deutsche Bank is particularly strong in multi-asset products. As one of the few banks with a dedicated hybrid structuring and trading team, we use unique risk management techniques dedicated to offer innovative risk allocation strategies involving several asset classes.
In alternative assets we have few rivals. Our foreign exchange team pioneered the development of FX-linked investment products, while our fund derivatives team was voted the best hedge fund products provider in 2008.
HW: What is your approach to managing risk?
MS: Our S&P X-Alpha fund uses an integrated risk management mechanism that targets a volatility of eight per cent. This mechanism employs a dynamic exposure management, which adjusts the exposures of each value and growth index pair regularly to adjust their return/volatility contribution to the strategy. Additionally, we employ a second dynamic exposure management, which adjusts the exposure of the overall basket of value and growth index pairs regularly.
Our Zins Strategie Fund achieves a fixed-income type of risk by using basis allocations calculated using historical simulations and resulting in the strategy having an historical volatility of five per cent. In addition, a weekly stop-out signal system allows the strategy to cancel its allocation to any component showing volatile behaviour in the short term.
Our strategies are systematically managed, which allows us to explain the risk control mechanisms to our investors in a very transparent manner.
HW: What events do you expect to see in your sector in the year ahead?
MS: We believe the credit and liquidity crunch combination will continue to direct investors towards wrapped investment strategies, with greater transparency and reduced risk. We see a challenging rest of 2009, and an especially challenging period for asset managers, but we are cautiously optimistic for the growth of the business.
HW: How will these developments affect your own portfolio?
MS: We believe that with our range of funds across all asset classes, we are in a good position to take on the possible challenges. Our current portfolio of funds comprise of funds covering a diversified range of strategies and asset classes that can provide an interesting alternative to clients' current investments.
HW: Are investors' expectations moving towards capital preservation? If so, how do you deal with this?
MS: During 2008 the fund industry saw a heavy shift of assets towards the money-market space, while investor confidence returned gradually during the first half of 2009. We believe that our range of funds puts us in a good position to take on the possible challenges going forward.
HW: What differentiates you from other managers in your sector?
MS: We offer more than 100 different funds linked to a range of different asset classes, offering a range of different payout structures, and managed by different teams and strategies. We insist that all our funds operate under strict rules, and that investors get all the information they need to monitor their fund's activity and performance on a daily basis.
We believe it vital that independent companies are involved in all areas of fund operation such as fund management, custody, fund administration and audit to ensure that funds are being operated and risk-managed properly. We only work with globally recognised service providers in custody, fund administration and audit.
HW: Do you foresee problems in raising mandates from investors through 2009? If so, what are the factors that will drive investors back to your funds?
MS: Raising fresh cash with new mandates has been difficult in the first half of 2009, but going forward, we believe that with our range of funds, we are in a good position to attract new mandates across all asset classes.
HW: Do you have any plans for other product launches in the near future?
MS: Apart from focusing on the distribution of our recently-launched funds, such as the S&P X-Alpha and Zins Strategie funds, we are currently working on several initiatives. We are currently putting a special focus on innovative strategies in the foreign exchange space.
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