The German investment market remained robust and continued to grow in 2017. This benefited open-ended retail funds as well as special funds, both of which recorded cash inflows.

At the end of 2017, the asset management companies managed a total of 6,449 open-ended investment funds (previous year: 6,122) with assets amounting to €2,062 billion (previous year: €1,908 billion). Of these funds, 2,417 (previous year: 2,194) were retail funds with assets totalling €498 billion (previous year: €451 billion) and 4,032 (previous year: 3,928) were special AIFs with assets of €1,564 billion (previous year: €1,457 billion).

Aggregate (net) cash inflows into retail and special funds amounted to €94.9 billion (previous year: €119.96 billion). (Gross) cash inflows amounted to €331.7 billion (previous year: €310.3 billion), of which €115 billion was attributable to retail investment funds (previous year: €106.8 billion) and €217 billion to special AIFs (previous year: €203.5 billion). This was set against cash outflows totalling €236.8 billion (previous year: €190.3 billion).

In 2017, BaFin approved a total of 138 new retail investment funds in accordance with the Investment Code (previous year: 151), including 107 UCITS (previous year: 99), 7 open-ended retail AIFs (previous year: 12) and 24 closed-ended retail AIFs (previous year: 40).

Open-ended real estate funds and hedge funds

The number of asset management companies authorised to manage open-ended real estate funds was steady at 58. 1 company received its authorisation in 2017 and 1 surrendered it.

While 21 asset management companies had also established open-ended real estate funds for retail investors (previous year: 22), 37 companies had limited their activities to the management of open-ended real estate special funds (previous year: 36). Of this number, 4 companies have to date not established any open-ended real estate funds.

3 open-ended real estate funds for retail investors were established and 1 open-ended real estate funds for retail investors was liquidated in the course of 2017, increasing the total number of these funds to 53 (previous year: 51). The fund volume of this market segment amounted to €92.33 billion as at the end of the year (previous year: €89.48 billion).

In 2017, gross cash inflows into open-ended real estate funds for retail investors amounted to €7.9 billion, the same as in the previous year. Gross cash inflows into open-ended real estate special funds increased for the seventh year in succession, to €16.2 billion (previous year: €14.9 billion). The fund assets of open-ended real estate special funds amounted to €88.2 billion at the end of 2017 (previous year: €75.6 billion).

21 open-ended real estate funds for retail investors were in liquidation at the end of 2017 (previous year: 20). Their fund volume amounted to €3.92 billion (previous year: €8.2 billion). The management rights for 19 of these funds have already been transferred to the depositary (previous year: 14).

There were 14 hedge funds in Germany at the end of 2017 (previous year: 14). The total volume under management was €3.43 billion (previous year: approximately €3.02 billion). As in the previous year, there were no German funds of hedge funds in Germany in 2017.

Experience with the supervision of closed-ended funds

As a result of the introduction of the Investment Code in summer 2013, managers of closed-ended investment funds were placed under close government supervision for the first time. The aim was to provide better protection to investors against irregularities, such as inadequate product transparency, insufficiently qualified personnel and gaps in the organisation of providers. This marked the beginning of a new supervisory regime for both the sector concerned and investment supervision at BaFin.

Interpretive decisions

The Investment Code, the statutory orders issued under this code and the German Regulation Implementing the AIFM Directive (Durchführungsverordnung zur AIFM-Richtlinie) contain a large number of detailed rules for asset management companies and closed-ended alternative investment funds (AIFs), especially if they are intended for marketing to retail investors. Nevertheless, BaFin had to make decisions on many interpretive issues and develop suitable standards for establishing an effective administrative practice. This will add to the complexity of the consultation processes between BaFin and applicants until a viable solution is found, although these processes are becoming increasingly more efficient over time.

Growing acceptance

Among the companies that have been placed under supervision as a result of the Investment Code, the initial reservations about being supervised by BaFin have given way to growing acceptance. Contributing factors have been regular informal exchanges at the working level and supervisory interviews with senior management, which are held at least once a year. In addition, many companies have come to realise that the transition to professional processes, clear structures and meticulous documentation pays off, not only in their dealings with BaFin.

However, BaFin also found that some companies still have to work on their professionalism and business philosophy. For example, a few small asset management companies are unable to find adequate access to target investments or investors. BaFin has also observed major differences in the quality of depositaries, including alternative (trustee) depositaries, the legal advice provided by the companies and the reports produced by the auditors of annual financial statements.

In smaller asset management companies that only apply for registration, it is hard to identify any shortcomings, because the level of supervision prescribed by law is not sufficient. However, significant differences in quality compared with authorised asset management companies are revealed at the latest when a special audit is conducted or an application to convert the registration to full authorisation is reviewed.

Senior management

BaFin also subjects candidates for senior management positions to particular scrutiny. For companies, it is often difficult to recruit appropriately qualified and experienced people who are able to accept the high level of responsibility for protecting the interests of investors. Since, during the times of the unregulated capital market, these companies normally did not practice any risk management that would have come anywhere close to the standards of the Investment Code, the candidates would have had to gain the required operational experience in institutions governed by the Banking Act or through relevant audit activities, for example. However, BaFin and the companies are increasingly able to agree on tailored induction and transitional solutions which the supervised companies can ultimately see as a success.

Large number of business models

In addition to the legal pioneering work during the early years of the Investment Code, the supervision of closed-ended funds was also shaped by the analysis of a large number of specialisations, asset skills, product lines, corporate structures and service relationships. BaFin also gained valuable insights by shadowing special on-site inspections, sometimes even at external service providers abroad, in order to develop a first-hand understanding of the work processes and the external conditions around them. This approach also shows up inconsistencies between the documents submitted and reality.

We will be in a better position to measure the extent to which regulation under the Investment Code leads to better products for investors in a few years' time, when the first closed-ended AIFs launched under the Investment Code have been liquidated. BaFin has no way of checking whether the decisions taken by asset management companies make financial sense. But it defines the outer framework of their business and encourages perception in the market by enforcing transparency requirements. Where there are signs of conflicts of interest and non-market-based costs or valuations, BaFin will intervene.

Foreign collective investment undertakings

In 2017, there were 10,183 EU UCITS authorised for marketing (previous year: 9.795). BaFin processed a total of 1,006 new notifications by companies wanting to market EU UCITS in Germany (previous year: 941). As in previous years, most of the notifications – 592 in total – came from Luxembourg. In addition, 276 notifications were received from Ireland, 52 from Austria and 45 from France. Marketing was discontinued for 565 EU UCITS.

In addition, 1,591 EU AIFs and 285 foreign AIFs from third countries were authorised to conduct marketing in Germany (previous year: 1,402 EU AIFs and 266 foreign AIFs from third countries). Of the total number, 885 originated in Luxembourg, 269 in the United Kingdom, 234 in Ireland, 101 in the United States, 91 in the Cayman Islands, 72 in France, 45 in the Netherlands and 2 in Switzerland. In 2017, marketing for 553 AIFs (previous year: 525) started in Germany, including 287 from Luxembourg, 74 from the United Kingdom, 51 from Ireland, 39 from the United States and 17 from the Cayman Islands. 184 EU AIFs and foreign AIFs ceased marketing, including 56 from Luxembourg, 46 from the United Kingdom and 25 from Ireland.