Fund managers are also just people and by no means better investors than many ordinary savers. At least they too succumb to emotions such as hope and greed and sometimes risky large sums of money on individual shares, with which they then suffer high losses in an emergency. At least this consolation remains after the bankruptcy of the payment service provider Wirecard. He showed one thing very clearly: until recently, many German fund managers had relied on the strongly fluctuating share because they had hoped for disproportionately high profits. Although the warnings grew louder. And even far beyond what is required and adhered to in the diversification of fund assets according to the Personal-Financial.com Investment Code. Or better said: should actually be adhered to. Because the words of the law are one thing – but how they are interpreted by fund managers and regulators is obviously quite another thing.
Since it has broken down the share price from EUR 104 to EUR 2.39, some fund companies have felt compelled to put their Wirecard investment figures on the table. And in individual cases they really didn’t look good, they showed a big minus in the tens of millions. For example, the fund company DWS, which held thick Wirecard share packages in several flagship funds, lost two to three percentage points of annual return on its funds because it added larger share packages to its portfolio in the spring. That’s a lot: For example, the DWS Deutschland Fonds generated a minus 3 percent return over the year, while the Dax rose by 0.4 percent. From a three-year perspective, the fund stands at minus 5.8 percent, the Dax is around 0.8 percent up.
Against the background of the information that industry services and rating agencies have gathered about the exposure of fund companies, investors should now be particularly careful: It was not just Wirecard shares that were in DWS ‘custody accounts, up to the prescribed limit of 10 percent of the fund’s assets. Rather, she also had tracker certificates on the Wirecard share from the Swiss bank UBS – and overall relied much more heavily on the Dax group than the numbers in the regular fund reports suggested at first glance. Overall, DWS Germany – the third largest fund for German stocks in Europe – was invested in Wirecard with around 12.5 percent, the industry service Finanzszene and the rating agency Morningstar report. Although the capital investment law (KAGB) sets the magic upper limit of 10 percent for individual stocks.
The rules are being stretched
Because the laws and fund guidelines state: A maximum of 10 percent of the fund’s assets may be invested in shares of one company at a time. In addition, all positions that exceed five percent may not together make up more than 40 percent of the fund’s assets. This is the so-called 5-10-40 rule in the industry. It is intended to avoid the imbalance in funds that results from excessive betting on individual titles. And in the end they pose a great risk to investors, as the Wirecard collapse has shown. Fund managers should also – and especially – be forced to diversify. Because according to this rule, there must be at least 16 different positions in an equity fund: four of a maximum of 10 percent and 12 of over 5 percent. The derivatives regulation also states: “Derivatives must be included when calculating the utilization of the investment limits.”
Does that mean that fund companies ignore these rules if, in addition to the individual stocks, they put so-called 1: 1 derivatives on the same individual shares in the custody accounts? The rating agency Morningstar has obtained an opinion from the financial regulator. With an astonishing result: According to their “constant administrative practice” 1: 1 certificates are “neither derivatives, nor financial instruments with a derivative component”, Morningstar received in response. But they are simple securities. In plain language, the financial regulator does not look at the underlying share (in this case, Wirecard), but only at the issuer of the certificate (in this case, the Swiss bank UBS). From this point of view, risk diversification was sufficient because the two were different parties.
Of course, one can argue whether this administrative practice makes sense. And it will certainly have to do so in the coming months. Because one thing is clear: this will not have been the only case in which fund managers have stretched the limits of the investment law. And from the regular reports of the funds it is difficult for private investors to see which underlying assets the certificates are based on in individual cases and how many 1: 1 certificates are below each. Meticulous data collections are required for this. The supervisory authority Bafin could at least have it submitted and regularly evaluated. After all, according to the statutes, it is just as committed to consumer protection as it is to market surveillance. Even if this is only mentioned in passing.
The Morningstar rating agency drew a conclusion from this: it punished the relevant funds by reducing their rating. Because in their eyes the expansion of the borders proves a very weak risk management of the respective investment houses.