Reform of open-ended funds hit by delay

The re-enactment of the German Investment Act, which includes a number of new regulations for open-end property funds, has been delayed due to the harsh criticism voiced by interest groups and capital investment companies, newspaper Borsen Zeitung has reported. The cabinet meeting scheduled for February 14 has been moved back to mid-April', suggesting that the new law is unlikely to come into effect before October or November 2007.

The draft bill submitted by the German finance ministry would radically change the structure of the open-ened funds. The biggest change relates to the division of open-ended property funds into two classes: yield-oriented funds with a focus on growth and the so-called safety-oriented or low-risk funds.

Under the new regulations, the safety-oriented funds will only be allowed to invest in certain areas, for instance the EU, Switzerland, the US, Canada, and Japan, while investments in Latin America and China will no longer be permitted. Up to now, open-ended property funds in Germany were able to invest worldwide, provided the foreign currency risk did not exceed 30%. The new regulation will also limit the foreign currency risk (without currency hedging) to 15% and the outside capital quota to 30% for safety-oriented funds. Currently the highest permissible outside capital quota is 50%. This will remain the same for yield-oriented funds.

Safety-oriented funds will continue to be obliged to offer share redemption on a daily basis, but yield-oriented funds will have the option to waive daily share redemption.

Under the bill, project development risks will be curtailed, with portfolio and project developments no longer allowed to exceed a 15% and a 5% share respectively for the yield-oriented and the safety-oriented funds.