Key currency trends amongst German fund managers

Germany is a founding member of the European Union and was one of the first countries to adopt the euro on 1 January 1999, when it became a euro-area member.

The dual circulation period, when both the Deutsche mark and the euro had legal tender status, ended on 28 January 2002, drawing to a close the use of the mark, which had been legal tender in Germany since the currency reform of 1948.

The euro steadily grew to a peak of 1.6 euros to the dollar in 2008, before entering a gradual decline following the financial crisis.

The euro now generally sits around 1.1 euro to the dollar, however, it has experienced significant volatility in recent years. Notably in 2022, the currency’s value dropped below the dollar for the first time since 2000.

Being both a founding member of the EU and the third largest economy in the world by nominal GDP, it is perhaps no surprise that Germany’s trade within and outside of the EU is comparable. Trade within the bloc accounts for 61% of Germany’s imports and 55% of exports, whilst trade with the rest of the world accounts for 39% of imports and 45% of exports.

MillTechFX recently surveyed 250 fund managers across Europe to find out more about their FX set up, risk management, hedging programmes and journey towards automation.

From the research, it’s clear that currency management is top of mind for German fund managers. In this blog, we will take you through the findings in relation to fund managers in Germany including their FX exposure, pain points, hedging strategies and priorities.

• FX is of great significance to German fund managers
• Manual processes driving automation
• FX Transparency struggles
• German hedging trends
• The importance of counterparty diversification in Germany
• ESG is a priority in Germany
• FX should be a key priority for German fund managers in 2024

FX is of great significance to German fund managers

• German fund managers consider FX to be of greater importance than the rest of Europe with 97% saying FX was significant to their business, compared to the European average of 88%.

• Over three-quarters (79%) of fund managers in Germany stated that their returns have been affected by euro volatility, slightly below the European average of 89%.
• German fund managers had the lowest amount of business activity exposure to foreign currencies amongst their European counterparts, however this percentage was still significant, with, 30-39% of their business being exposed to foreign currencies.

Manual processes driving automation

• Our research revealed that fund managers in Germany still rely heavily on manual processes for FX execution, with 35% relying on email to instruct financial transactions and 29% relying on phone calls.
• This process is a huge drain on human capital, with our research finding that on average, fund managers in Germany have nearly three team members tasked with FX activities and spend almost three days per week on FX-related matters.
• Fortunately, the vast majority of German fund managers (94%) are looking into new technology and platforms to automate their FX operations. This is the highest percentage of all European countries we surveyed.

FX transparency struggles

We asked German fund managers if they thought there was a lack of transparency in the FX market and the answer was a resounding yes:

• 76% stated they thought there was a lack of transparency in the FX market.
• This was backed up by the fact that when German fund managers were asked what the most challenging aspects of their FX operations were, the top two answers were forecasting and cost calculation (41%) and getting comparative quotes (32%).

German hedging trends

• Given that the majority of German fund managers said their returns were impacted by EUR volatility, it’s perhaps unsurprising that 79% hedge their forecastable risk
• 86% of those that don’t are now considering hedging given market volatility. This is in line with the European averages of 77% and 88%, respectively.
• 52% of German fund managers reported that they hedge all or a large proportion of their FX exposure. This is less than the rest of Europe, with 77% of European fund managers hedging all or a large proportion.

• They also reported an average hedge ratio of 30-39%, with 59% stating that this was higher than the previous year. This is in line with their European counterparts, with 61% of fund managers surveyed reporting their hedge ratio increased from last year.
• Hedging costs for the vast majority of fund managers across Europe rose in the past 12 months (84%) and this was similar in Germany, with 85% of fund managers reporting an increase in hedging costs.

The importance of counterparty diversification in Germany

The banking crisis in 2023 sent shockwaves throughout the finance industry. In Switzerland, a globally systemic bank stood on the brink, for the first time since Lehman Brothers and in the US, three regional and specialised banks failed in rapid sequence. 

Whilst the banking sector has seemingly stabilised since the turmoil of Spring 2023, many senior finance decision-makers at European fund managers are taking lessons from the crisis on board. 

• Our research found that 91% of fund managers in Germany are looking to diversify their FX counterparties, slightly above the rest of Europe (90%).

ESG is a priority in Germany

Driven by increased pressure from investors, governments and consumers, ESG criteria are now central to the decision-making process for many fund managers. Our survey found that the trend has also begun to play an increasingly important role in selecting FX counterparties and service providers. 

• This rang true in Germany, with 89% of fund managers responding that ESG credentials impact their selection of FX counterparties and 65% saying it impacts their decision to a great extent.

FX should be a key priority for German fund managers in 2024 

With uncertainty set to stay, we believe the management of FX currency risk should be considered a top priority for German fund managers in the year ahead. 

Fortunately, there are several ways they can improve their FX risk management infrastructure and protect their returns in these uncertain times:  

Transaction cost analysis (TCA) – TCA was specifically created to highlight hidden costs and enables fund managers to understand how much they are being charged for the execution of their FX transactions. Ongoing, quarterly TCA from an independent TCA provider can be embedded as a new operational practice to ensure consistent FX execution performance.  

Comparing the market – We believe that fund managers should seek alternatives to the traditional single bank-based approach. Instead, they should look for solutions that enable them access to live rates from multiple banks and execute at the best rate, all whilst reducing the operational burden traditionally associated with this kind of market access.  

Outsourcing – There is a growing recognition that outsourcing does not necessarily mean a loss of control, less transparency or reduced quality of FX activities, but when using the right partner outsourcing can improve transparency and execution quality. Outsourcing can therefore enable fund managers to dedicate more time to core business matters, which is all the more important amidst inflationary and volatility pressures.  

Strong governance – FX is one of the largest and most liquid markets in the world, but also one of the most complex. Setting up and onboarding new FX counterparties, centralising price discovery and navigating the post-execution phase require a team of people and often have their own complications. Harnessing solutions which can enhance transparency and governance can help fund managers improve the cost, quality and transparency of their FX execution.  

Diversification of liquidity providers – Recent events in the banking sector show that reliance on one or two counterparties can be an extremely risky strategy, as the loss of a major FX counterparty could render firms unable to trade. We believe fund managers should begin exploring technology-driven alternatives to the single bank-based approach that enable them to transact in FX in a way that addresses risks associated with a single point of failure. 

Automation – Despite the rising threat of currency movements, many fund managers continue to rely on manual processes like phone and email to execute FX trades which may make it harder to mitigate the impact of currency volatility. Harnessing automated solutions can offer end-to-end workflow, greater transparency and faster onboarding, helping finance departments streamline their FX functions. 

How MillTech FX can help 

MillTechFX is an FX-as-a-Service (FXaaS) pioneer that enables fund managers to access multi-bank FX rates via an independent marketplace.  

MillTechFX’s market access, pricing power and operational resource enable it to deliver a tech-enabled integrated solution that delivers transparency, cost reduction and operational burden reduction for senior finance decision-makers at fund managers.  

It is end-to-end at no additional cost, offering easy and quick onboarding, multi-bank best execution and hedging management, and connectivity into clients’ bank accounts, internal systems, administrators or custodians.

To speak to us directly please reach out to our EU sales team on eusalesdesk@milltechfx.com , phone number +33 1 88 24 98 90, or request a free TCA here. 

Find out more at https://www.milltechfx.com  

 

This blog post examines & refers to the data and results of a survey by Censuswide on MillTechFX’s behalf conducted between 10 November and 27 November 2023 based on a survey of 250 senior finance decision-makers at mid-sized asset management firms in Europe (described as those with assets under management ranging from €500m to €20b). The full survey can be found here.