Deutsche Bank Star Investor's Bad Year Hasn't Put Off Clients

(Bloomberg) -- Deutsche Bank AG’s Klaus Kaldemorgen just suffered the worst year since he started his namesake fund almost seven years ago. That didn’t stop investors from adding a near-record amount to the strategy.

Clients poured 2.3 billion euros ($2.8 billion) into the 7.5 billion-euro Deutsche Concept Kaldemorgen last year, the second-most after 2015, when they added 2.4 billion euros. The inflows were the biggest among Deutsche Bank’s stock and mixed-allocation funds and helped Kaldemorgen close the gap with DWS Vermoegensbildungsfonds, the stock fund he ran for almost two decades and which became a staple in many Germans’ portfolios.

“Clearly, Kaldemorgen’s short-term performance is under pressure if you look at the performance of the main competitors,” said Said Yakhloufi, head of mutual fund analysis at rating company Scope. “But he’s still one of the biggest names among German fund managers, and investors might have a lot more patience with him than with others.”

The inflows show the continuing prominence Kaldemorgen enjoys in Germany, where he’s a household name almost like Fidelity’s Peter Lynch in the U.S. -- a star manager who helped popularize mutual funds during the heydays of the industry. As head of DWS Vermoegensbildungsfonds, Kaldemorgen successfully rode the dot-com rally in the late 1990s, then navigated the crash and later the financial crisis, burnishing the DWS brand that’s the centerpiece of Deutsche Bank’s planned asset management spinoff.

Now in charge of a more flexible, hedge-fund-like strategy that bears his own name, the 64-year-old is still one of the biggest draws for DWS, even after defensive wagers on U.S. bonds and dividend stocks left the fund trailing peers in 2017. Kaldemorgen, who started his asset management career as a bond manager, says with the global rally entering its ninth year and several markets looking highly valued, now is not the time to chase quick returns.

‘Sense of Risk’

“We’re in one of the longest and most profitable bull markets of all time,” he said in an interview in Munich. “The longer such a run goes on, the more I see caution and concern are being thrown overboard. Investors seem to have lost the sense of risk.”

Kaldemorgen says his lackluster performance last year was due to the decline in the U.S. dollar, which eroded returns on fixed-income investments, and a stock market characterized by very little volatility, which made it hard to buy into dips. While he doesn’t predict a big decline for the stock market as a whole, volatility will probably return as areas such as the technology sector and the U.S. market are ripe for corrections.

“A market with no volatility and one direction only is my worst case,” he said. “That’s what happened in 2017. But 2018 should be different.”

Unlike his prior fund, Deutsche Concept Kaldemorgen has no traditional benchmark, though it uses a money market index to determine its performance fee. The fund aims to achieve a total return by investing in different markets and instruments while limiting downside risks. It can bet on falling markets through derivatives such as options and futures, allowing it to hedge.

Hedge-Fund Fees

The fund’s fees certainly are hedge-fund-like: depending on the share class, it charges retail investors a 1.5 percent management fee and 15 percent of profits that exceed the return of the Eonia Index, derived from overnight unsecured lending between banks. The performance fee is capped at 4 percent of average assets and is only paid as long as the fund is above its high-water mark.

Morningstar said in a study last year that the fund’s fees were a “major drawback.”

“Fees are clearly a concern for investors in Kaldemorgen’s fund, especially after it has gathered so many assets,” said Ali Masarwah, a fund analyst at Morningstar in Frankfurt. “I also would question the suitability of Eonia as a hurdle rate for levying performance fees since this fund has a clear long-bias and is geared toward reaping equity and corporate bond risk premia, including high yields.”

The fund made money for investors in each full calendar year since its 2011 inception, and Kaldemorgen has told clients that his fund could return 3.5 percent to 4.5 percent in current markets. That compares with a 7.7 percent average annual return he produced while running DWS Vermoegensbildungsfonds over almost two decades, though that was a stock fund.

‘Risk-Averse’

Deutsche Concept Kaldemorgen fell short of the target last year with a return of just 0.9 percent, trailing 83 percent of mixed allocation funds, according to data compiled by Bloomberg. Morningstar, which classifies it as an alternative fund, also shows it trailing peers, though it still outperforms over three and five years.

The Carmignac Patrimoine fund, one of Europe’s biggest mixed allocation funds with 22.6 billion euros under management, was roughly flat last year and returned an average of 1.7 percent over three years.

Kaldemorgen says he took a conservative approach in part because much of the money he’s gathered is coming from investors who were driven out of bond markets by the European Central Bank’s negative interest rates, and who are looking for some upside with a lot of protection.

“I’m cautious because that’s my conviction, but I also need to be cautious in order not to disappoint our clients,” Kaldemorgen said. “They are rather risk-averse.”

‘Pain Threshold’

Overall, equities made up about 40 percent of the fund’s holdings, before hedging. By the end of November, the latest available filing on the company’s website, shares of Deutsche Telekom AG, Europe’s biggest phone company, ranked as the fund’s fourth-biggest position behind a Deutsche Bank floating rate fund, a gold ETF and an Italian government bond. Deutsche Telekom shares lost almost 10 percent last year on stiff competition in its German home market and accumulating operating losses at its computer-services business.

Of the fixed income side, U.S. bonds still made up the largest chunk with a total share of 7.7 percent. While yields on the debt beat returns from European sovereigns, the dollar’s 12 percent decline against the euro more than offset those gains for the fund. Italian bonds rank second and Luxembourg debt third.

Kaldemorgen says he reduced exposure to high yield bonds and switched to government bonds instead, more as a substitute for cash than as a strategic move. He says he doesn’t see any obvious trigger for an end to the global rally, except perhaps for China and its high debt, but that doesn’t mean he’ll go all in.

“Above all, investors should not lose any money,” said Kaldemorgen. “On the upside, the pain threshold is higher.”

To contact the reporter on this story: Oliver Suess in Munich at osuess@bloomberg.net.

To contact the editors responsible for this story: Erhard Krasny at ekrasny@bloomberg.net, Christian Baumgaertel, Paul Armstrong

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