Dare to Speak the Truth

Published on 2013/02/11
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It’s been barely five years that the closed-end fund sector placed 12.7 billion euros in equity, and did so almost exclusively among private investors. Last year, private placements were down to approximately 3.1 billion euros, according to the VGF Association of Non-Tradable Closed-End Funds.

What would it take to turn the down-trend around? The key prerequisite for the industry would be to dare to face the facts. Facing up to the truth would mean in this context to accept the root causes of the crisis and to draw the proper conclusions from the insight.

The explanations offered in order to make sense of the persistent crisis fail to convince me.

One of the explanations is the following: “The financial crisis has made investors wary of entering into long-term commitments.” While there is a kernel of truth in this, the argument does not really hold water. After all, direct investments in real estate – condominiums and apartment blocks – are more popular than ever. Buyers will pick up assets of this type as soon as they hit the market, never mind the steady price growth. And prices do keep rising, because demand is outpacing supply. Meanwhile, investors are prepared to accept double-digit transaction costs. Consequently, explaining the crisis of closed-end funds by citing the fear of barely fungible long-term investments is plausible only to a certain extent.

Another explanation goes like this: “The financial and Euro crisis has made investors risk-averse, so that they prefer to put their money on savings accounts and other supposedly safe investments.” This assessment may have been correct a few years ago, but it is no longer plausible. The demand for equities funds or other high-risk investments – such as SME bonds – are the highest they have ever been. In early January, more equities fund shares were sold worldwide than at the peak of the dot-com boom in early 2000. Even in Germany, demand is higher than it has been for many years. Investors are no longer as risk-averse as they were at the height of the financial crisis and the Euro crisis.

So it is high time for the industry to acknowledge that the true cause for the massive lapse in faith among investors is that too many investors and sales organisations were burnt by closed-end funds, and not just in recent years. Among the top ten initiators that dominated the market in the late 1990s, just three are still in business, these being Jamestown, DWS (the former Deutsche Grundbesitz), and Commerz Real (formerly CFB). The other seven initiators went out of business, and their investors lost much of their money.

If you look at the top-ten list of the late 1990s, you will see the names of now defunct companies whose eponymous founders ended up serving long-term sentences, such as Banghard or Falk. Also listed among these top ten initiators are companies like IBV, Kapital-Consult and Fundus, that became the object of thousands of law-suits, and the investors of which wish to this day they had never committed themselves. Unfortunately, the recent experiences many investors made with a variety of other fund types – such as media funds, ship funds or life insurance funds – has not been much better.

That the image of closed-end funds is not as good as the industry would want it to be can therefore not be blamed on a conspiracy of vicious journalists, but ought to be traced back to tangible reasons that the industry is well advised to study in self-critical reflection.

Instead, the industry has opted in favour of another strategy approach: rather than seeking to regain credibility through honesty, it tried to dazzle investors and sales organisations by presenting the closed-end fund model as a “economic miracle in miniature.” The only thing this campaign achieved was to provoke a slew of critical articles about closed-end funds in the press and frustration among sales organisations.

Being honest would also require the industry to stop trying to persuade investors, sales organisations and the public with academically untenable “analyses” suggesting – as did a “survey” published last year by the VGF – that 82 % of all closed-end funds produced a “capital appreciation.”

Countering biased and undifferentiated negative portrayals of the “closed-end funds” product by painting an equally undifferentiated, inaccurately bright picture is bound to backfire. Such an approach will achieve the opposite of what it was set out to do. A wilted plant will not be brought back to life by painting it a luscious green.

For the time being, the industry takes comfort in the hope that the institutional business will pick up steam. If, however, you look at the figures presented by the VGF this year and last year, it becomes perfectly obvious that only a few providers – namely those with advanced asset competence – have managed to attract institutional players on a major scale, cases in point being IVG, Jamestown, Real I.S., Commerz Real, Signa, KGAL, and LHI. The latter companies actually fund-raised more equity among institutional investors than the VGF statistics suggest; yet they did so with other vehicles not covered by these same stats. Any provider, though, who lacks a convincing track record, and whose competence used to be spent on the creation of glossy sales prospectuses and marketing stories for private investors rather than on sound asset management is unlikely to gain any ground with institutional investors.

About the Author

Dr. Rainer Zitelmann is one of the leading experts for the strategic positioning and communications of companies.

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