Following a slump two years ago, the German special fund market is likely to feel less of a tailwind in the years to come than in its previous long growth phase.

While pension funds and insurers have invested an ever larger proportion of their assets in special funds over the years, and thus contributed significantly to the growth of the segment, investors will no longer substantially increase the special fund proportion of total assets in the future, Clemens Schuerhoff, CEO of the consultancy Kommalpha, said in an interview with Börsen-Zeitung.

In recent years, it was not only the long-term growth in financial assets that was relevant, but also the growing importance of special funds as an investment instrument. For example, the share of fund vehicles in the capital investments of pension funds gradually grew from 35% at the end of 2005 to 69% at the end of 2023, as Kommalpha points out, citing data from the Bundesbank. Insurers increased their share from 20% to almost 35% in the same period.

The volume of special funds grew considerably in the same period: the fund portfolios of pension funds increased eightfold to 562 billion euros between 2005 and 2023. Insurers increased the volume by almost two and a half times to 549 billion euros. These portfolios have continued to grow in value since the beginning of the year.

However, new business is now slowing down: In the current year to the end of July, pension funds withdrew a net amount of 1.4 billion euros from special funds. There had already been a similarly high outflow in the same period last year, after inflows totalling billions of euros had been recorded in each of the previous years. Investments from insurers remain far behind the figures for previous years.

Kommalpha boss Schuerhoff points to the consequences of the interest rate turnaround: Whereas in previous years investors had looked for investment alternatives in the face of low, zero and negative interest rates, and thus often invested via special funds, investing directly in bond portfolios has once again been a viable alternative since the interest rate turnaround. Insurers in particular are in a position to manage bond portfolios themselves, instead of mandating fund companies to do so. A saturation point has been reached for special funds, says Schuerhoff. „The fund ratios will remain at around current levels.“

The segment has already suffered one setback: Due to the turnaround in interest rates, the value of bonds collapsed in 2022 and share prices also fell, causing the AuM of special funds to drop by 12% to 1.9 trillion euros in the same year. The volume has since largely recovered and stood at 2.1 trillion euros at the end of July. However, the previous high of December 2021 has not yet been reached.

Further growth might come from both rising asset values and the savings behaviour of private households, channelled into various types of funds. Banks and corporates also utilise special funds.

However, Schuerhoff expects a tipping point around 2030, after which millions of people from the baby boomer generation will retire every year. Many pension schemes and related institutions will then utilise assets instead of adding new portfolios.