Saturday, August 8, 2020

“It is still too early for hot bets”

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Frankfurt DWS boss Asoka Wöhrmann is an indestructible stock fan. The recent crash on the stock exchanges doesn’t change that for him. “We have probably already seen the low point in the Dax at a good 8200 points,” he says in an interview with the Handelsblatt. You can already get back into solid, low-valued stocks. “If politicians manage to return to normal in the next few months, the markets will also recover in the second half of the year.”

However, the fund manager is not entirely sure whether this will succeed. It was right and important that politics initially “only paid attention to the health of the citizens”. But now Wöhrmann warns of a “uniform roadmap for a return to a certain normality”, “otherwise we will not only face a collective run-down, but a long-term recession”.

How the DWS will develop in the coming months also depends on the revival of the economy. The corona-related crash in the markets has unfortunately more than erased the asset manager’s “wonderful start to the year in the first two months”. The full extent of the decline in earnings will only become apparent in the entire industry in the second quarter. “We will have to work very hard in the second quarter,” warns Wöhrmann.

This can also have consequences for employees. “The crisis works like an efficiency accelerator. For example, we will further simplify our management structure and integrate it globally, ”announced Wöhrmann. This can also have repercussions for remuneration: “Last year went very well for us, so we paid the employees and management accordingly. But it is also clear that if we cannot repeat the performance, this would also affect the performance-related remuneration – especially for managers. ”

Read the entire interview here:

Mr. Wöhrmann, there is a mask requirement throughout Germany. What design do you dare to use in public?
My wife sewed three masks for me. Today I have this light blue mask with white dots. My daughters’ masks are more colorful. Of course, as DWS we are also well supplied with masks. And our Chinese cooperation partner Harvest sent us another 30,000 masks. We have enough to donate a few.

The market crash has pulverized trillions of assets. What do you think, the passbook is experiencing a renaissance after such an experience?
No. This decade is and remains the decade of zero interest rates, the decade of sustainability and the decade of algorithms. Interest will not come back. Countries around the world are in massive debt, but not even that has led to an increase in interest rates – because the central banks keep interest rates low with bonds never seen before.

A savings book does not generate any interest, but the courses do not plummet.
The correction in the markets was brutal. It took four and a half months for the stock slump that we experienced in a very short time because of Corona even after the bankruptcy of the US investment bank Lehman Brothers in the financial crisis. Then we experienced a more than eight-year stock market boom at a record level. And this crisis will not last forever. A savings book is not suitable for wealth creation.

Shares, on the other hand, are not an option for certain large investors because they have investment restrictionseor regular, calculable income. What do you advise them to do?
Corporate bonds are more attractive again. Their yield spreads have risen again compared to government bonds. However, due to the risk of default, you have to choose carefully what you buy. Not many investors are getting involved at the moment, but that will change in the second half of the year. In other segments, such as government bonds in the western world with shorter terms of up to five years, where active fund managers cannot deliver added value compared to the indices, passive ETFs are the better choice in the long run.

From your point of view, when can investors trust themselves in shares again?
We have probably already seen the low point in the Dax at a good 8200 points. Many haven’t quite noticed it yet, but the pandemic’s negative flow of news has actually been over for four weeks.

Well, the partial entry of the state dominates the headlines at a Dax group like Lufthansa.
If politics considers a company to be systemically important and assumes market failure, it must intervene. But this should not happen according to the watering can principle. We must not become a republic of state-owned companies because of the corona pandemic.

An invitation to invest in stocks sounds different.
There are opportunities to buy. You can get back into solid, low-valued stocks. It is still too early for hot bets. The potential for a setback there would be too high if a second pandemic wave occurs in autumn. If politicians manage to return to normal in the next few months, the markets will also recover in the second half of the year.

Do criticisms or doubts shine through in the crisis management of the federal government?
I think Germany has reacted very prudently and has so far weighed well between protecting health and restricting civil liberties. It was right and important that politics in the first phase of the pandemic paid attention only to the health of the citizens.

But?
We have to get out of this exceptional situation with extensive contact barring. Politicians have to solve a very complex decision matrix. We need a balance between protecting health and protecting people’s livelihoods. We must not miss the time when the economic and social self-healing powers are still taking effect, otherwise a recession can also turn into an economic depression.

When does it become dangerous?

The critical point for me is when unemployment rises irreversibly and massively. And we’re not that far away. It is also extremely dangerous politically. Nothing in Europe has had as politically destabilizing effects as high unemployment. Populists were strengthened and governments were swept away, for example in Spain, Italy or Greece.

What should a balance act to return look like?
We soon need a clear and, as far as possible, nationwide timetable for a return to a certain normalcy. Otherwise we will face not only a collective collapse, but a long-term recession. German SMEs and manufacturing in particular would then be on the brink. Of course, such a roadmap must be linked to conditions such as social distance, wearing masks, washing hands and the like. These restrictions will surely be with us until next year. This also includes the question of how many people in office jobs should leave the home office in the near future.

How many DWS employees are currently working in the home office?
92 percent work at home. We woke up relatively early on the dangers of Corona. In February we closed our offices in Asia, then the locations in Europe and the USA. Around March 10, all employees were in the home office with the exception of an absolute emergency. And I will definitely not bring back more than 40 percent back to the offices in the first half of the year.

How did your employees react?
In some cases there was really hard resistance because many did not realize at the beginning that every customer meeting, every meeting with a broker should now take place virtually. Many also questioned whether IT could take it. But it works. You can manage funds, set fund prices and communicate from home without any problems. And for a lot of background work, we don’t need the employees in the office every day. Often it would be enough if they only work in the office once a week. Many would never have believed that, not even I.

What made you think differently?
I had to get myself tested on Corona. The result was negative, but I voluntarily isolated myself for two weeks – and found out how intensively and concentrated I could work in that time. My living situation is of course more privileged than most, but this crisis will help change our understanding of work flexibility. I spoke of the decade of algorithms, representative of what we like to generalize as digitization. It is the prerequisite for being mobile and able to work at home. And for the digitization of our everyday work, this crisis acts as a catalyst.

More home office means less need for office space. Surely the costs could be further reduced?
We need further savings. But it doesn’t happen that quickly, such contracts have been concluded for a long time. Incidentally, we no longer have a permanent, dedicated workplace for every employee. In New York, for example, the number of jobs is about 80 percent of the number of employees. And this ratio could decrease further in the future. Many companies are currently thinking about this.

How clearly do you have to lower the costs?
I don’t think much of absolute numbers as a cost target. The cost-income ratio is important to me. I remain committed to our goal of keeping this efficiency indicator below 65 percent by 2021. This means that if sales decrease as they do at the moment, costs have to go down further – and this is easiest with flexible costs. This includes service provider costs, travel expenses, events and of course the expenses for employees. Last year went very well for us, so we paid the employees and the management accordingly well. But it is also clear that if we cannot repeat the performance, this would also affect performance-related remuneration – especially for managers.

How extreme could the variable remuneration decrease in an extreme case? Sometimes to zero?
It is far too early for such discussions. I am proud of how we as DWS have managed the crisis so far. We have neither registered short-time work nor cut jobs. Not many are lucky with this stability.

What does that mean for the bonus of your fund manager Tim Albrecht, who made a very big bet on Wirecard?
Listen, active fund managers need space to place bets. That is their job. Nobody is well advised to talk to their active fund managers. Indeed, Tim Albrecht is currently implementing a strong conviction in a company. He has beaten the Dax consistently for many years and enjoys our complete trust. By the way, fund managers can sometimes be wrong. As long as they have trimmed their portfolio again after a certain amount of time, that’s not a problem for me.

Do you not share the criticism of Wirecard by other large fund companies after the final KPMG report?
I leave a judgment to those who have dealt with the matter much more intensively than I did in my role.

How hard does the corona crisis hit DWS?
We showed good resilience in our earnings and profits in the first quarter, even though March unfortunately more than wiped out our wonderful start to the year in the first two months. In the second quarter, the full extent of the decline in earnings will become apparent across the industry. We will have to work very hard in the second quarter. But if it succeeds in gradually normalizing economic activity again, then in the third and fourth quarters we will at least move towards normalcy again.

Does that mean you have to cut jobs?
The crisis acts like an efficiency accelerator. For example, we will further simplify our management structure and integrate it globally. We will strengthen key positions and delete less important ones. In this environment, managers must live up to their management responsibilities more than ever. I also announced it to you in an interview at the beginning of 2019 and we implemented it: in the past year alone, we reduced 40 managing directors without having a negative impact on our performance. And this year too, the following applies: at the end of the year fewer people will be employed by us than in the previous year.

How drastic is the downsizing?
The acceleration of efficiency cannot be measured purely in terms of the number of employees. Because we sometimes bring back previously outsourced tasks back into the company. We are currently not planning to cut jobs despite the pandemic. For example, we have frozen new hires for several months, which also saves money. And we are also examining more closely in which areas settings are really necessary and whether it is not easy to fill some positions internally.

Even before the corona crisis, the asset management industry was under considerable pressure. Where do you need to strategically sharpen?
Corona hasn’t changed the big challenges in our industry. The long-standing low interest rate situation is affecting many asset classes and the margins are shrinking due to the oversupply and competition from listed index funds. We are investing in growth areas, such as Multi Asset, where we have now brought another real heavyweight to DWS with Björn Jesch, and in Asia, which will emerge stronger from the crisis.

China has opened up to foreign asset managers. We want to deepen our cooperation with Harvest and are looking for a new strategic partnership with which we can build a platform for our products. I also consider sustainable investments to be an important growth area.

Will sustainability still play a major role after the corona crisis?
Sure, this megatrend is irrefutable. The twenties will be the decade of sustainability. We are increasingly converting our active funds in particular to an approach that takes sustainability aspects such as the environment, social issues and good corporate governance (ESG) into account. But passive ESG systems are also in increasing demand. In 18 months we want to manage 80 percent of our assets under management according to ESG criteria.

Doesn’t the pressure on the industry also force consolidation?
There has long been a wave of concentration in the environment of the fund industry, only in the core of the asset management industry has the consolidation not yet come through. This may be because there were examples in the Anglo-Saxon area that didn’t work well. We want to actively participate in the consolidation over the next year and a half. Providers of active or passive products in Europe, the USA or Asia would be conceivable – if they fit us. It would also be exciting to strengthen alternative investments through a purchase.

How interesting would UBS be for you?
We could buy a small provider alone. Larger takeovers or mergers are more complicated, also due to our ownership structure. There are already interesting big names in Europe.

You sound very willing to spend again that you supposedly have to save so much.
I’m not talking about tomorrow. And I don’t want to use all of our resources for acquisitions that we might need to stabilize our business after the corona crisis. However, we still keep our eyes open for buying opportunities. But this year the focus of the entire management must be primarily on coping with the crisis and emerging stronger from it.

Mr. Wöhrmann, thank you very much for the interview.

More: Investment funds: These funds will be the winners after the corona fiasco.

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