Adding the numbers

A short mathematical problem for my eight years old son to solve:



·       At 30/09/2011, the total NAV (Net Asset Value)of the German open ended funds was 85.151 mEUR.

·       At 30/09/2012 (a year later) the total NAV  ofthe German open ended funds was 83.173 mEUR

Assuming that over the period the asset value is only influenced by net flows, can you calculate how much theses in(out)flows are ?

Here is my son’s answer (and any other kid for that matter):The total flow for the period is equal 83.173 – 85.151 = - 1.979. Given that this number is negative, this is an OUTFLOW.

You think this is obvious. Well it is not. At least not for the Bundesverband Deutscher Investment-Gesellschaften or BVI. For the German Funds Association which states that “it enforces improvements for fund-investors and promotes equal treatment for all investors in the financial markets. BVI`s investor education programs support students and citizens to improve their financial knowledge”, the simple math above do not work.

According to the BVI the correct answer to the question above is a net INFLOW of EUR 2.766 mEUR. In other words 83.173– 85.151 = +2.766…

This is not an isolated mistake. If you look for the BVI net inflow publications for real estate open ended funds from 2007 to 2011 theses are the numbers you will dig out:

 

While “NET inflow” for the period was around EUR 13.7 b, the total NAV of the funds grew by a little less than a 10^th of that. How does this work? 

In order to understand the forces at work, you need to take a look at the same set of numbers, published this time by the Deustche-Bundesbank. The Bundesbank publishes two additional numbers. One is the total outflow, and the second one is the total distribution paid. The Bundesbank also make it crystal clear that the NET-inflow numbers disregard any distribution.

The previous table looks like this in the Bundesbank report:

 

 

With this additional information the numbers make sense (the reason why the numbers do not add-up exactly is because of the underlying performance of the funds which impacts the NAV). The so called Net Inflow, is for the most of it, not more than a dividend re-investment scheme. It has NO influence whatsoever on the amount of money available to invest in real estate.  

The information which is has been provided by the BVI to the market for years is highly misleading. The vast majority of the market participants believe that the net inflow which is publish is what it name says it is: Net inflow, ie. new money that is coming into real estate.  Here are a couple of example of some investors/advisors that have been across the years willingly or not mislead by the BVI communication.

http://portal.cbre.eu/portal/page/portal/RRP/ResearchReportPublicFiles/5_German%20Open-ended%20Funds_September%202012.pdf

http://eres.scix.net/data/works/att/eres2012_ind_103.content.pdf

http://www.prres.net/Papers/Seek_International_Property_Investment_Trends.pdf

Google will provide you with dozens of other examples. Since the publication of the last BVI figures last week, I have received at least 5 daily emails of investment banks mentioning the fact that open-ended funds had EUR 2,7 b of inflow year to date. All of them were hinting to the fact that this money will need to be invested (at least partly), therefore driving demand. This is just not the case. In actual fact, the total amount of money available for investment in real estate went DOWN.

The BVI recently published an analysis where it found that there are significant deficiencies in the corporate governance of German listed companies. That might as well be true. But assuming the BVI really cares about the topic, I would strongly encourage them to start cracking at their own issues first.

NB: all the numbers quoted in this post are sources from:

http://www.bvi.de/fileadmin/user_upload/Statistik/BVI_Investmentstatistik_201209.pdf

http://www.bundesbank.de/Navigation/EN/Publications/Statistical_supplements/statistical_supplements.html (supplement 2 as of 28/09/2012)

It's a wonderful life

An interesting development in the life of the open-ended fund industry has hit the news today. 

In a press release published today (http://aox.ag/IGAUNd), SEB ImmoInvest is trying to achieve what none of its peers dared to try before. Move from a bank run situation back to a stabilized situation.  They are doing so by pointing on to shareholders the actual consequence of the run. 

The last sentence of the press release that quotes current SEB Asset Management CEO goes as follow: 

Barbara A. Knoflach: “We are asking our investors to consider the alternatives and, by staying invested, to commit to a future of the fund that could very well live up to its successful 23-year track record. The only chance to avoid the liquidation of the fund with all its consequences is not to take advantage of the exit offer.”

I would like to state clearly that this is a very brave move, and indeed, in my view, the only way to put any of the closed funds back into action. 

I have discussed in a previous post the interesting game theory issue that the closure of open-ended fund closure was posing (http://aox.ag/JpQleh). Any one who took the time to run this game would have figured out that this could only work out positively if players increased COOPERATION. This is exactly what SEB is trying to do. Again that is the right thing to do. 

However, I need to point out to one major weakness in the way this is done. There is a lack of clarity on the potential outcomes for each scenario (going concern or liquidation). For cooperation to work and players to see a benefit in cooperation they need to understand that cooperating in the game will lead them to a higher benefit (payout) that acting individually (which in this case end up in a run). While to some extend this is suggested by the press release (the liquidation of the fund AND ALL ITS CONSEQUENCES) it is not explicitly said that a run will probably end up in a much lower payout… To the contrary its insist on the quality of the underlying portfolio as an argument to keep the fund running.  If holders believe that they will get the same value in liquidation than in a going concern, than the cooperation will simply not work. 

I do not know any real life example of any thing like this being done before on such a scale (but would be interested if anyone have any knowledge of this). I can however recall James Steward managing to save its bank with 2.000 dollars in the 1946 It’s a wonderful life movie. Looking back at the scene of the bank run might be a good idea, to understand how he got people to cooperate… http://aox.ag/Ijy0Rn. 

Nash Equilibrium

A number of open ended funds are offering their unit holders a very nice opportunity to make good usage of game theory and figure out what to do next.

Some funds (see related article in the Immobilien Zeitung -in German- http://aox.ag/lvAZK1 ), are asking their current unit holders, what would be their behavior if the funds were to reopen for redemption. The underlying idea, is that the more unit holders opt for redemption, the more likely is the fund to liquidate.