Hans-Dieter Bauernfeind and his colleagues in the asset management operation at Dresdner Bank had good reason to feel happy with themselves as they prepared for the festive season and looked forward to 1996. It had been a productive year for the giant German bank – particularly in the asset management field.
In the first interview for this profile in September of last year, Bauernfeind had been just as upbeat. The head of investment management talked of the crucial role the asset management operation had to play in the future strategy of the Dresdner Bank Group. Here was ‘an important pillar’ in the group’s overall strategy, he said. Here was growing earnings potential against a background of intense competition in other business areas, such as investment banking. Of course, the addition of Kleinwort Benson Investment Management (KBIM) to the asset management stable – in the wake of the $1.4 bn acquisition of the UK investment bank earlier in the year – helped ensure that things were ticking along nicely from a growth perspective, too.
But Bauernfeind had other things on his mind as well at the September meeting. ‘We have great intentions in the United States,’ he stressed. ‘We’re thinking how best to expand our operations in the US. One option is to buy an asset manager, but that’s still under discussion.’
Three months later and it was time to get an update. Dresdner Bank announced its acquisition from Travelers Group of San Francisco-based RCM Capital Management for $300 mn in mid-December. Bauernfeind believes that the RCM purchase fills what has often been regarded as the ‘black hole’ in the bank’s global asset management operations – the US. RCM has around $26 bn of assets under management invested in domestic US and international equity, fixed income and a range of other instruments.
‘RCM has a lot of experience in the US and has a very interesting client list,’ says Bauernfeind. ‘It’s got an excellent track record, especially in the pension business, and will become a flagship of our global investment arm in the future.’
The Dresdner Bank investment arm has been working out in more ways than one over the past year. It now has around $170 bn of investment muscle to flex, putting Dresdner in the higher echelons of European fund managers: using end 1994 figures it ranks as number six. Perhaps most importantly, it places Dresdner on a level with its German banking rival Deutsche Bank which has approximately the same level of funds under management.
The operational structure of the asset management group is a reflection of that size. There are 25 asset management units with offices in 15 financial centres scattered across the globe. Locations range from Dublin to Sydney, from New York to Singapore. The units reflect specific investment expertise. For example, the London-based Thornton Group specialises in emerging markets in Asia and has other offices in Hong Kong, Tokyo, Sydney and Taipei. Deutscher Investment Trust (DIT) is one of Germany’s leading mutual fund operations and its subsidiary – Dresdnerbank asset management SA – specialises in managing mutual funds under Luxembourg law.
Other units include the head office operation, which specialises in segregated accounts and managing funds for central banks and supranational institutions; Paris-based Banque Internationale de Placement which specialises in money market funds and derivatives; and dbi/DCI which manage Spezialfonds, generally launched for a single institutional or corporate investor. Last but not least are the new members of the family – KBIM and RCM.
Despite this global feel, Dresdner’s asset management bread and butter remains centred around Germany. Institutional money accounts for around 70 per cent of its funds with nearly three quarters of that coming from domestic clients. Those funds are invested 80 per cent in Germany. Nearly half of the total goes into bonds; just over a third into equities; and the remainder is spread across real estate, investment funds, cash and other instruments.
Bauernfeind expects the German focus to decrease in the future as the asset management operation fills up its American ‘black hole.’ ‘In the past when we’ve approached investors in, say, the Far East, we’ve been regarded as a Deutschmark asset manager,’ he says. ‘With RCM we can show expertise in US dollar investments and that should change how potential customers see us.’
Along with the hope that potential customers are going to change their perception of Dresdner’s asset management strengths comes internal change, with the need to absorb the new acquisitions into the group’s global asset management strategy. The group has announced that the RCM purchase will be the last of its forays into the Anglo-Saxon fund management scene – for the time being at least. ‘We’re a bigger family now and we want time to absorb those new members,’ says Bauernfeind. ‘That’s not to say that if we see something which is very attractive to us we would turn away. We just won’t be going out to look for them.’
But the integration process does not mean that the new acquisitions will be forced into changing their decision-making or investment allocation approaches. This is key to the way the units operate. After the recent RCM acquisition it was affirmed that the new US operation would ‘retain management and investment autonomy, while leveraging the network and resources of the Dresdner Bank Group’. Centralised control comes into play in centrally coordinated marketing and sales efforts, not in asset management decision-making. Bauernfeind also says that corporate executives who want to approach fund managers can make initial contact through the head office to be pointed in the direction of the most relevant unit and asset managers.
‘Our principle is to give each asset management unit autonomy, with responsibility for their own product performance and quality,’ says Bauernfeind. ‘There’s nobody here in the head office making decisions for them in asset allocation. I don’t believe in a committee sitting in Frankfurt and deciding on how a portfolio is managed in, for example, Hong Kong. It would be managed without knowing exactly what a client’s ideas are, or what they want from performance.’ He believes that central committees are of value in ensuring a level of quality control across the asset management units, not in directly determining the strategy for asset allocation within those units.
Bauernfeind refers to clients as the ‘first benchmark’ and argues that switching fund managers away from them purely to fit the new acquisitions into a global strategy would be the equivalent of the group cutting off its nose to spite its face. It will be setting up a strategic steering committee, however, to determine how to manage the needs of new clients and which unit can best serve their interests. The committee will consist of Bauernfeind; Rolf Passow, managing director of DIT/dbi; Sir Nicholas Redmayne, chairman of KBIM; and an as yet undetermined member from RCM.
The devolved approach to investment management doesn’t mean that there are no asset allocation committees in each unit. There are. But the individual fund managers retain a high level of control over the running of their portfolios in tandem with each client’s wishes. Bauernfeind believes that asset allocation committees cannot guarantee good results. It is the individual asset managers’ talent in seeking out opportunities through active asset allocation which brings success. Methods of asset allocation and selection of benchmarks vary from unit to unit but will be fixed after assessing a client’s individual investment parameters in tandem with an analysis of the needs for risk and return.
Portfolios are modelled using a bottom-up approach for equities from a selection checked by fundamental analysis and based on a historical time series. There is a top-down approach to the selection of bonds with markets checked by fundamental or quantitative analysis. Both instruments tend to be selected by quantitative analysis but, again, that depends on the unit and the desires of specific clients. A mixture of quantitative, value-based and fundamental approaches are used for stock selection across the different units.
Once a basis portfolio has been determined then active asset allocation comes into play to create added value. This, too, is controlled by defined parameters so that the fund managers’ desire for added value is not compromised by increased risk. Parameters are defined using a top-down global investment strategy; a bottom-up approach for stock selection; and derivatives for cost-effective strategy implementation and fine-tuning of the asset mix.
The group’s investment philosophy is summed up in its brochures as being characterised by two words: vision and discipline. Bauernfeind initially chuckles when asked for further explanation: ‘That’s from the marketing department,’ he says. He goes on to explain that his point of view might be better reflected by putting more of an emphasis on the discipline side of the investment equation.
The brochures define that discipline as being ‘achieved by combining fundamental insights with a rigorous quantitative investment process. Through active decisions, we aim to enhance the performance of portfolios by controlled deviations from the long-term portfolio structure.’
Bauernfeind adds his own twist: ‘The strength of the European operation is based on the quantitative approach,’ he says. ‘We want to control the risk to clients and we discuss that with them. But we have other approaches available.’ He adds that the requirements of clients vary from region to region so it is vital for the asset managment units to have a command of different approaches to meet the risk/reward needs of those clients.
Bauernfeind points out that RCM leans towards a growth-based approach, along with other disciplines, and acknowledges that the group’s other asset management units can learn from the American acquisition. ‘RCM has a level of experience which is far ahead of our own experience because asset management is so much more advanced in the US,’ he says. ‘We have to admit to that. We can learn a lot, but it can also learn and benefit from our experience.’
One field in which the Dresdner group has an undoubted advantage is in its in-house research strength. As one of Europe’s largest banking groups, Dresdner is able to support two in-house research facilities which it refers to as ‘think-tanks’: the Dresdner International Research Institute (Diri) and the Economic Research Department.
Diri is a subsidiary of Dresdner Bank in its own right and has over 80 analysts and number-crunchers providing research for the various units of the group. Most of the analysts are based in Frankfurt, New York and Tokyo with others in London, Paris and Zurich. With the Kleinwort Benson acquisition Dresdner has created an integrated research group by combining Diri with Kleinwort Benson research under the Kleinwort Benson label.
For equities, the various teams provide market strategy research on over 20 markets and company research on more than 100 German and 100 other European companies. In bonds, market strategy research covers 15 markets as well as money market and risk management analysis. The Diri analysts also provide quantitative portfolio research for base portfolios, asset allocation and special projects. As noted above, the new acquisitions have their own in-house analyst teams and external research is also used throughout the group.
The fund managers don’t shy away from their own research, either. Bauernfeind stresses the importance of company visits in the active management of portfolios but adds that it is necessary to ensure that fund managers do not spend more than 10 per cent of their time ‘playing the role of analysts’. That rule does not apply to those managing small cap portfolios, where he recognises that it is vital to understand and keep in close contact with managements.
As Bauernfeind and his colleagues work to bring the acquisitions into the fold during 1996 they are already looking further ahead. Anglo-Saxon acquisitions might be on hold for the time being – unless something really attractive comes its way – but there’s plenty of growth from other directions. The asset management units received new mandates worth $1.04 bn between August and December last year and the asset management group is looking for growth of around 15-20 per cent a year through to the end of the century.
Dresdner Bank sees much of this growth coming from more companies turning to independent asset managers to run their pension fund management operations. Bauernfeind expects the asset management units to be managing around $500 bn by the year 2000. He acknowledges that may seem something of a tall order considering that the figure is currently under $200 bn with only four years to go. But as he says: ‘This is an expanding business.’
