The value of pooled investments held by German pension funds increased by more than 300% between 2005 and 2018, according to research company Kommalpha. Along with life insurers, pension schemes were the most interesting investor segment for the German fund and asset management industry, it said.In a long-term survey of insurance companies and pension funds, Kommalpha found that both investor types had significantly increased their use of investment fund vehicles over the past decade. Pension funds’ assets held in pooled funds grew by 338.2% between 2005 and 2018.Before the financial crisis roughly €85bn from an aggregate €242bn (35%) in pension assets had been invested via funds. This figure hit €370bn out of a total of €611bn (61%) at the end of June 2018. The researchers confirmed a “strategic market trend of reallocating assets from the classic direct investments to indirect investments via a fund structure”.This was linked to a “specialisation, internationalisation and diversification of the investment structure”, Kommalpha said.It also meant that the use of “external asset managers within the framework of Master-KVG mandates” – a German pooling vehicle for institutional investors – has increased, the company reported.However, Kommalpha emphasised that this development was also creating risks, “which is not always acknowledged within the asset management industry”.The analysts pointed out the increase in indirect investments in the portfolios of pension funds and insurers means there might be “disruptions” to these asset pools “given the fragility of the financial markets”.This risk was particularly pronounced at times when “a significant amount of assets is allocated within a relatively brief period”, they added. Pension funds and life insurers in Germany usually have a strong annual inflow of contributions.Kommalpha warned of defaults including “depreciation, write-offs or indeed a complete loss of assets”.However, the company said these were worst-case scenarios, and that the management of institutional portfolios in Germany was “characterised by diversification, risk management and the professionalism of the stakeholders”. The full report (in German) can be downloaded on the Kommalpha website here.German Spezialfonds still king, but not for bondsAs their use of pooled fund vehicles increases, German pension funds and insurers still prefer domestic providers, the survey showed.Given the complex regulatory framework for institutional investments in Germany, most investors still rely on the domestic “Spezialfonds” structure created for them.Similar fund structures domiciled in Luxembourg were mainly used for alternative investments, Kommalpha found.Over the last decade the share of bond allocations held in Spezialfonds vehicles reduced significantly, from over 40% to less than 10%.This was mainly down to this asset class dwindling in importance for institutional portfolios, but also to some large pension funds and insurers having taking bond management in-house.As per end-June 2018 German pension funds had invested €410.7bn in 741 Spezialfonds.The highest increase in volume was found to be among providers of funds-of-funds and mixed-asset Spezialfonds.