Deutsche graduates from institutional to retail market

Globally responsible for managing over $1 trillion,Deutsche Asset Management (DeAM) is a key business unit of Deutsche Bank AG, one of the world’s major financial institutions. DeAM manages over $30 billion on behalf of Australian-based clients, an estimated 5 per cent market share. Two-thirds of this is in traditional investments and one-third in alternative investments (including direct property).

The 250-strong local team includes over 60 investment professionals.

Chief executive Ross Youngman describes DeAM’s investment philosophy as “leveraging expertise through portfolio construction processes that emphasise exhaustive independent research and rigorous quantitative risk attribution and control. The result is a breadth of product, all along the efficient frontier.”

Portfolio managers work within a team environment. A culture of ‘star performers’ is not encouraged nor rewarded. “We employ sophisticated risk management controls and, as such, we believe our portfolio construction techniques are at the forefront of the industry.”

Chief investment officer Andrew Fay adds that “in every asset class we have developed repeatable processes. Each of these is designed to create consistent active positions while meeting different client performance requirements. Portfolios are simultaneously client specific and consistent.”

Fay says the group complements asset management in core asset classes by offering alternative approaches and assets, as well as help in defining appropriate asset allocation, scheme design, and the best structures and methods of transition to the new position. Research is in-house through over 5,000 company visits per year and coverage of over 40 equity and bond markets.

Performance has been good. Deutsche Australian Equities Alpha Fund has outperformed the S&P/ASX 300 Accumulation Index by 2.9 per cent per year since its inception in June 1999. The Australian equities core product (with a lower performance objective, but using the same philosophy and process as the Deutsche Australian Equities Alpha Fund) has outperformed the index in 24 out of 36 quarters (since 1994 when the product first started).

Deutsche Paladin Property Securities Fund outperformed the S&P/ASX Property Accumulation index by 1 per cent for the year to September 2003 and has delivered a return of 12.3 per cent per year since its inception in February 1995.

The Gold Fund, a US mutual fund managed in Australia, has delivered a return of 71.4 per cent for the 12 months to September 2003, outperforming the SSB Precious Metals Index by 22.1 per cent. The cumulative three-year return to September 2003 was 200 per cent. The fund is the best ranked gold fund by 18 per cent over 12 months. It is also the number one ranked gold fund over most time periods.

In Australian fixed income and cash, Deutsche Cash Plus Fund outperformed the Bank Bill Index by 0.6 per cent per year since November 2000 (which marked the inception of the Cash plus strategy), ranking it in the top quartile in the InTech Survey of September 2003.

The Deutsche Australian Bond Fund outperformed the index by 0.9 per cent for the year to September 2003 and 0.6 per cent for the three years to September 2003 (ranking top quartile in the InTech Survey for both periods).

The Australian bond team has provided consistent top quartile performance and has been the number one ranked manager in industry surveys in 11 of the past 15 months (Intech Australian fixed income manager surveys on rolling 12 month returns).

The Global Equity Select product is DeAM’s newly introduced global equities product with a track record dating back to April 2001. The product outperformed the MSCI World Ex-Australia Index by 5 per cent since April 2001, which would have placed it in the second quartile against its peers (InTech Survey September 2003).

DeAM’s Australian origins go back to 1974 when Deutsche Bank opened a representative office in the country. When Australia’s financial system was deregulated in 1985, Deutsche was the only European bank to be granted an Australian trading bank licence.

In 1999 the Morgan Grenfell and Bankers Trust asset management businesses (bought in 1997 and 1999) changed to Deutsche Asset Management. A year later, DeAM sold its financial planning business to National Australia Bank. Then in 2001 it boughtAXA, boosting its property funds under management by over $2 billion.

But the major step towards becoming one of the world’s leading asset management businesses was in 2002 with the purchase of Zurich Scudder Investments, a move which increased DeAM’s funds in the Asia Pacific region by around $30 billion to $170 billion.

The deal positioned DeAM to become the world’s fourth largest asset manager, as well as a leader in the US retail funds management market.

In 2002 DeAM also finalised a strategic relationship withZurich Financial Servicesin Australia that sees Deutsche contracted as the investment manager for Zurich’s investment mandates. The agreement involves around $7 billion in funds under management.

Looking ahead, Youngman is clear that DeAM will remain a manufacturer, with the focus on the investment process and product packaging.

“We are comfortable owning no distribution. It is a clean model and helps us differentiate ourselves,” he says.

He expects growth to be largely organic by boosting its market share.

He talks about offering a broader product range “to leverage our local and global manufacturing capabilities”.

He feels that DeAM has evolved from institutional expertise to the retail market.

The Deutsche Australian Small Companies Fund has delivered a return of 41 per cent (net of fees) since its inception in April 2003 — outperforming the S&P/ASX Small Companies Index by 11.6 per cent.