GERMANY - Incoming regulations in Germany will see institutional capital leave open-ended funds and be reinvested in Spezialfonds, according to a report by CB Richard Ellis (CBRE).

Iryna Pylypchuk, associate director of EMEA research and consulting at CBRE, argued that amendments to the German Investment Act due in 2011 would render the open-ended fund sector the preserve of retail investors.

Pylypchuk said spezialfonds would attract capital leaving German open-ended funds (GEOFs) because they were vehicles dedicated to institutional investors and often managed by the same fund managers.

"Spezialfonds offer similar levels of returns - normally slightly higher because they do not need to retain as much cash as the open-ended funds - and their strategies are not dissimilar to those of the GEOFs, focused on core assets and markets, although generally in smaller lot sizes," she said.

The main aim behind the amendments to the German Investment Act was to give greater protection to retail investors, set out clearer rules on the timing and structure of redemption freezes and outline other steps necessary to protect investors into the funds in the case of a crisis.

One of the key protections for small investors is a €5,000 exemption, whereby withdrawals of as much as €5,000 per month will be exempt from the restrictions on liquidity, meaning GEOFs can still be used as a source of regular pension income.

The new rules came in response to a number of fund closures among GEOFs in recent years, as well as the first ever liquidation of a GEOF in KanAM's US Grundinvest.

They will come into force in January 2011, although it will not be until the end of that year that the funds are expected to have implemented the changes fully.

Those funds that are struggling with liquidity problems today will therefore not benefit from the new proposals for some time, Pylypchuk said.

"Clearly, the GOEF sector today is experiencing a period of major change," she said.

"While there is still very little clarity over the future of some funds currently closed to redemptions, most will continue to thrive and benefit from their broad retail investor base.

"So while the near-term legislative implications and recent events will be turbulent and involve more asset disposals and further outflows of institutional capital, the medium and long-term implications point to a stronger, retail investor-focused industry, especially if the new amendments succeed in strengthening the position of retail investor."