Fund & Asset Manager Rating Group

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1 Traditional Asset Manager / Germany Full Rating Report Asset Manager Rating Deutsche Asset & Wealth Management Germany comprises Deutsche Asset & Wealth Management International GmbH and Deutsche Asset & Wealth Management Investment GmbH Outlook Stable Profile Asset under management EUR1,100bn Date of creation 1967 Domicile Germany Ownership 100% Deutsche Bank AG Total staff 6,000 Investment professionals (640) Note: figure refer to global business, 3Q15 Key Rating Drivers Leading Global Asset Manager: The rating of Deutsche Asset & Wealth Management Germany (Deutsche AWM) is driven by its robust operations and processes, positively differentiated investment process and sophisticated risk management. Deutsche AWM is the market leader for retail investment in Germany and second for institutional investment. Deutsche Bank Reorganisation Underway: The forthcoming separation of the wealth- and asset-management divisions creates some uncertainty. However, the impact on the rating will be limited as asset management remains one of the bank s core divisions. There have been some senior-level staff changes announced although these also will have only a limited impact on the rating given the depth, and to date, relative stability, of other senior staff. Deep, Efficient Control Framework: Risk management and governance provide holistic, multi-level assessment of business and fund risks. Service-provider governance and operational risks are strongly covered. Investment risk management is fully embedded in investment processes and quantified through enterprise-wide risk analytics including liquidity risks and stress testing. Highly Formalised Investments Decisions: Deutsche AWM's investment processes are highly formalised and consistently applied globally. Its global investment resources are significant and it shares bottom-up analyst views effectively through proprietary information sharing tools, complementing its top-down CIO View and model portfolios. Fitch considers the role and strength of the investment quality management teams a differentiating factor. Effective Operating Model: Deutsche AWM's operations are supported by specialists and effective automated workflows between the manager and State Street Bank and Trust Company (AA/Stable/F1+), its main outsourcing provider for back office functions and custody services. Fitch considers its institutional and retail reporting capabilities to be high quality. Aladdin Largely Implemented: Deutsche AWM implemented Aladdin as its core front and middle-office system in 2015 in EMEA and the Americas. The implementation has been successful, with only minimal operational issues. Deutsche AWM expects to commence implementation as the risk management tool and as the core operating system in Asia in 1Q16. The next step will be the revision of the operating model to optimise Aladdin. Analysts Alastair Sewell, CFA alastair.sewell@fitchratings.com Manuel Arrivé, CFA manuel.arrive@fitchratings.com Category Scores Company Controls Investments Operations Technology Source: Fitch Profile Good Standards High Standards Global Asset Management Company: Deutsche AWM is the asset management arm of Deutsche Bank AG (A/Negative/F1). Fitch s rating scope covers retail and institutional investment activities in Germany, where Deutsche AWM is a market leader. 17

2 AUM Breakdowns AM Development (Global) (EURbn) 1,150 1,100 1,050 1, AUM Breakdown by Asset Class Alternatives 9% Indexed 11% Other 12% Fixed income/money market 46% Q15 Equity 22% Source: Deutsche AWM, global AUM Breakdown by Geography Source: Deutsche AWM, global, 3Q15 AUM Breakdown by Investor Type EMEA (ex. Germany) 26% Asia Pacific 8% Americas 29% Source: Deutsche AWM, global, 3Q15 Germany 37% (%) Institutional Retail Wealth Management 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Source: Deutsche AWM, global, 3Q15 Percentage Company Structure Deutsche Bank AG DB Capital Markets (Deutschland) GmbH DB Finanz-Holding GmbH DWS Holding & Service GmbH Rating Scope Deutsche Asset &Wealth Management International GmbH Deutsche Asset &Wealth Management Investment GmbH Source: Deutsche AWM Related Criteria Asset Manager Rating Criteria (May 2014) 2

3 Company Shareholding and Financial Standing Parent commitment remains strong Increased profitability supported by asset growth Deutsche Bank AG recognised Deutsche AWM as one of its four core divisions in its Strategy 2020 document published in October Nonetheless, the bank is launching a reorganisation which will see wealth- and asset-management separated again (having been integrated in 2012). This creates some uncertainty. However, the impact on the rating is limited given that asset management is core to the bank and the wealth management activities fall outside the rating scope. Deutsche AWM is profitable, benefitting from net inflows. Total net revenues for the division for the first three quarters of 2015 were EUR3,992m, an increase of 15% over the same period in Management fees grew by 24% largely due to increased assets from net inflows (EUR33bn) and positive market effects. The company has no debt on its balance sheet and funds its working capital requirements through balance sheet liquidity. Deutsche AWM benefits from the financial resources of the parent (Deutsche Bank AG, A/Negative/F1). Asset management is integrated into Deutsche Bank s central financial planning. Experience Deutsche AWM s history dates back to 1967 (precursor and related firms to Deutsche Asset & Wealth Management Investment GmbH), with the addition of Deutsche Asset Management International GmbH, founded in 1983, to provide the legal framework to manage Spezialfonds. The overall business retains a strong German investor base but has over time diversified its investor base globally. Extensive experience; among the largest global asset managers Deutsche AWM ranked as a top-10 global bank-owned investment manager in 3Q15 and is one of the few asset managers with over EUR1trn in assets under management. It is the largest retail asset manager in Germany and the second largest institutional asset manager according to BVI data. Its AUM has grown since 2011, with a notable increase in Globally, fixed-income products (including money market funds) represent the largest share of Deutsche AWM s AUM; however, the German business is more diversified with an even split between fixed income and equities as the two largest segments. Deutsche AWM s fund structures include segregated accounts according to the German investment law, pooled vehicles primarily in the form of Luxembourg domiciled FCPs, UCITS (the European regulatory framework for investment vehicles) SICAVs or SIFs and a pooled pension fund platform. Sales Organisation Global Client Group Active Passive Alternative Real Assets Alternative Fund Solutions Source: Deutsche AWM 3

4 Company (continued) Governance and Independence Bank board level representation of asset management Deutsche AWM is, until the reorganisation takes effect, part of the asset and wealth management division of Deutsche Bank AG, which focuses solely on asset management and does not overlap with the bank s other activities. Once reorganised it will cover asset management activities only and wealth will be part of a separate division. The new CEO of the asset management division will be a member of Deutsche Bank AG s board, whereas the previous CEO served only on the executive committee. This development cements the core nature of asset management to the bank. The division itself is managed by its own global executive committee, to which local management teams report. Within the remit of an agreed Deutsche AWM enjoys latitude to pursue its day-to-day business independently. Deutsche AWM is subject to controls by Deutsche Bank s internal audit. Deutsche Bank AG compliance monitors potential conflicts of interest, which are kept in a separate register. Deutsche AWM has an up-to-date conflict of interest policy supported by a set of other policies targeting minimisation of conflicts. Deutsche AWM is authorised and regulated by BaFin in Germany and CSSF for its Luxembourgdomiciled products. The international arm is also regulated by the US SEC. Investment vehicle governance meets regulatory standards Deutsche AWM s legal entities have local boards as required by regulation; however the local management team is integrated in the global organisation. The group approach explains that there are no non-executive, independent directors at the local level. Should fund regulation require directors on the boards of the fund, Deutsche AWM typically fulfils the minimum regulatory requirements. All of the investment vehicles are fully regulated and externally audited. Staffing Matrix organisation with clearly defined roles and responsibilities providing multiple perspectives Senior management changes relating to reorganisation Clear compensation policy aligned to longterm organisational and fund performance The organisation provides strong segregation with defined responsibilities across global teams. Analyst teams have a matrix organisation structure with both regional CIOs (Americas, EMEA & APAC) and regional investment heads (fixed income, equity, multi asset and research) all reporting to the CIO. Additionally investment quality management falls under the remit of the global CIO. Connected units include trading (with regional leadership) and regional investment specialist teams. Asset management service and back-office functions are executed by a dedicated group related entity (DWS Holding & Services GmbH), comprising a total of 374 staff. Thereof 28 are in risk management. Deutsche AWM benefits from access to the group s global resources thanks to its integration. Business support functions are grouped in dedicated functional units. The group s global staffing resources practically limit key person dependency. There were some senior level staff changes announced in 2015: the CEO will be replaced by the former head of BlackRock s active alpha strategies division in 1Q16. The CIO also changed in 2015 with the EMEA regional CIO becoming global CIO, with some other roles changing at the CIO level as a result. These changes have only a limited impact on the rating due to the depth, and to date, relative stability of other senior staff. Deutsche AWM is subject to Deutsche Bank AG s global compensation policy. Part of Deutsche AWM s staff fall under the regulated employee status and compensation is subject to deferral rates and cash payment caps that are more conservative than required by regulation. A clear link is made between the performance of portfolio managers and analysts and their related bonuses. 4

5 Controls Overall Risk Control Framework Globally integrated, multilevel control structure The global risk oversight committee (GROC) oversees all of the asset and wealth management division, including Deutsche AWM. It has four permanent members and meets on a monthly basis. There is an audit committee and the manager is supported by numerous asset and wealth management specific second level risk committees such as the European risk committee, the European asset at risk committee, a broker governance committee and a pricing committee. Risk types are managed under four categories: fiduciary risk, market risk, credit risk and liquidity risk operational risk and capital risk (capital consumption). Key achievements in 2015 included the roll-out of a single risk framework for all product areas, including passive funds. Risk management is closely involved in the project to implement Aladdin State-of-the-art operational risk management Deutsche AWM s operational risk management is in Fitch s view state-of-the-art. The operational risk group publishes a monthly risk dashboard, which provides management with an oversight on the firm s aggregate risks and its key business risks, such as country risk composed by asset classes. It maintains a taxonomy of non-financial risks overseen by a divisional control office of 28 staff organised functionally and regionally. It is also responsible for the annual risk control self-assessment. Operational losses and near misses are monitored and are below Deutsche AWM s forecast levels. Operational losses were low in the year to end-3q15 and comparable to prior years overall but with a decreasing incidence. There were only two material (more than EUR100,000) losses to end-3q15, again low and comparable to prior years. There was only one material loss relating to the implementation of Aladdin in 2015 to date, driven by human error rather than a system issue. Relationships with third parties (and counterparty selection / monitoring criteria) fall under Deutsche Bank AG s service provider governance guidelines. These include standardised due diligence questionnaires, key performance and risk indicators, a quarterly and annual review and a central repository. High level of third-party scrutiny and oversight Deutsche AWM s key service providers other than group entities are State Street Bank GmbH, which provides custody services for the institutional business and back office functions, fund accounting and settlement for the asset management retail business. Deutsche AWM also works with a variety of different custodians/administrators selected at the discretion of the fund sponsor. For information technologies services Deutsche AWM uses IBM Integrated Technology Delivery and, notably, BlackRock Solutions in relation to Aladdin. All third-party relationships are well established and have been stable over time. Deutsche AWM s accounts are audited by KPMG. Compliance and Controls Comprehensive suite of compliance policies; posttrade still in Charles River Compliance issues are addressed through a comprehensive and regularly updated list of policies. They cover all relevant compliance areas such as business ethics, trade and client related topics, etc. Pre- (first) and post-trade (second) compliance checks were implemented in Aladdin in 2015 in EMEA. However, as of November 2015, Charles River was still running but will be decommissioned shortly (see Technology). There are dedicated dealing desks for equity and fixed income; trading can only be executed with approved counterparties. A dedicated, proprietary tool is used for daily best execution monitoring, supplemented by formal monthly report. There is a formal quarterly broker review process, and a monthly equity governance meeting. In Fitch view, trade allocation is well diversified although the share of trading routed to Deutsche Bank AG is not negligible. Monitoring against regulatory, legal or internal limits, related reporting and escalation procedures are in place and overseen by compliance. Limits are reviewed by risk management for adequacy. 5

6 Controls (continued) Control Framework Presentation of the different levels of controls Audit Committee Remuneration Committee Deutsche Bank Group level AWM Global Risk Oversight Committee (GROC) Other major global Committees Compliance Committee Reputational Risk Committee New products approval committee Regional and Local Committees Monthly AWM Operating Committee Europe European Risk Committee European Asset At Risk Committee Local Management Committee Supporting Sub-Committees Monthly Brokerage Governance Committee Equity/Fixed Income Pricing Committee European Anti money laundering Committee Investment Performance and Review Committee Regulatory Steering Committee Source: Deutsche AWM 6

7 Controls (continued) Investment Risk Management Robust stress testing capability combined with advanced quantitative risk management; moving to Aladdin as risk engine Risk management produces daily fund risk dashboards that include selected quantitative metrics (such as beta, value-at-risk, leverage) for each portfolio type, supplemented by weekly Risk Pulse overview reports (net flows, risk exposure by risk type, asset risk contribution, liquidity ranking) to capture potential hot spots and outliers. Risk analytics are well automated and supported by tools including case studies, root cause analysis and impact studies (e.g. implications of renminbi devaluation in August 2015). Quantitative investment risk analysis remained driven by RiskMetrics at November However, all risk tools will be moving to Aladdin in 1Q16, following a comprehensive review of Aladdin s risk functionality and external model validation process Control on valuations is performed by the custodian bank and dedicated asset class specific valuation committees convene quarterly or on ad-hoc basis should market conditions warrant. Solid liquidity risk oversight and control Deutsche AWM has clustered all its funds by liquidity risk profiles and its liquidity risk approach builds on cooperation with asset class specialists. Asset class specialists need to validate bid-ask spreads estimated from Barclays Liquidity Research. Weekly liquidity reports include the marginal contribution of assets to the liquidity ratio, liquidity ranking by asset and the main contributor to the liquidity stress test. Deutsche AWM receives research from Deutsche Bank AG s (offshore) global counterparty monitoring team, which conducts annual counterparty reviews. However, final counterparty approval is the responsibility of Deutsche AWM. Daily oversight includes early warning indicators based on movements of credit default swap spreads. Counterparty risk management integrated with Deutsche Bank AG framework The counterparty risk management team monitors OTC mark-to market exposure on an aggregate basis relative to the approved limits, which are reviewed on an on-going basis for creditworthiness as well as concentration. OTC counterparties are required to have a minimum rating of A- or equivalent and prudent collateral rules apply. Swaps are traded under a bilateral ISDA (International Swaps and Derivatives Association) agreement with a credit support annex stating eligible collateral. All swaps are matched with counterparties using SWIFT. Control of the adherence to the approved list of market counterparties is embedded in Aladdin, which systematically blocks trades with unapproved counterparties. 7

8 Investments Investment Resources DeAWM is well staffed globally. Front office organisation segregates research/analyst and PM roles. The EMEA fixed-income group comprised 90 staff in 3Q15, while the equity group comprised 33 staff. Both teams have grown while showing stability in senior staff. Additionally the investment teams demonstrate a good breadth and depth of experience. The multi-asset group had 50 investment professionals in EMEA and provides global balanced, multi strategy, convertible bond and risk engineering capabilities. Well-staffed & experienced investment teams Key investment decisions are taken by independent small (four to five members) portfolio construction teams across the group. These comprise asset class specialists with long market experience and typically a tenor of more than 10 years at the firm. Their role is to incorporate views from the global CIO office. Deutsche AWM has a well-resourced, 24/7 global trading desk split between fixed income and equities. Trading capabilities have been strengthened in 2014 both in staff and systems notably new broker selection models and order routing technology. Superior access to information and markets is a function of Deutsche AWM s size and geographical reach. Sophisticated best execution analysis and use of advanced trading techniques (notably block trading). Investment Staff Organisation Fixed Income/Cash Americas EMEA APAC Regional CIOs Equity Multi Asset Research Regional Investment Heads Investment Quality Management Connected Units Investment Specialists Trading Source: Deutsche AWM 8

9 Investments (continued) Investment Discipline A strategic and tactical CIO view as an important macro top-down input is the key engine of Deutsche AWM s idea generation and asset allocation. It incorporates and challenges analysts bottom-up views. Global CIO Signals (GCS) cover views on 22 predefined fixed-income and 19 predefined equity signals. This set serves as a key driver and guidance for small and independent, fully accountable portfolio construction teams (PCT) as key investment decision makers who convene on a weekly basis. PCT builds model portfolios seeking returns from a series of uncorrelated strategies and are responsible for sector and fundamental bottom-up asset selection (with quantitative screening). Autonomous, riskcontrolled investment processes Deutsche AWM s investment universe comprises more than 300 additional top-down macro recommendations, about 1,500 corporate bond issuers, 1,200 structured finance deals and 900 companies across sectors and regions, which are all aggregated and communicated effectively in G- Cube, the global communication platform. A dedicated module in Aladdin will replace G-cube in Research analysts need to provide their fundamental views as well as a long-term and short-term view and, in case of fixed-income issuers, ratings forecasts. PMs are in charge of calibrating the individual portfolios to the model portfolio according to investor guidelines and restrictions and the available risk budget based on various asset class dependent matrices. Fitch considers Deutsche AWM s systematic quality management a differentiating factor. The process is executed by independent teams on a monthly basis. It ensures oversight of each step in the process (measurement and evaluation of research signals, model portfolios and client portfolios) to identify analytical and investment skills and return attribution. Fitch considers the presence and role of this function a differentiating factor. Deutsche AWM has a clear investment, valuation driven and conviction related buy discipline. Selling is triggered by a change in fundamentals or conviction, violation of risk budgets, or existence of better opportunities. Changed research recommendations are communicated through alert to the lead PMs. Investment Process Research CIO view Macro & market framework Investment signals Portfolio Construction Dedicated small teams Final decision Model portfolio Implementation Adjustment for client specific constraints Daily oversight Quality Management (Performance, Process, Risk) Source: Deutsche AWM 9

10 Operations Operational Procedures Globally organised business services with segregated responsibilities (trade processing/fund accounting/reporting/performance measurement and attribution) and administration specialists are used for OTC derivatives, collateral management and securities lending. Effective largely outsourced operating model; operations now supported by Aladdin Aladdin was implemented in 2015 and acts as the key workflow tool, replacing various third-party systems. FIX replaced SWIFT for broker matching in Portware is integrated to Aladdin for equity trading. Deutsche AWM has outsourced custody to State Street Bank GmbH but has retained its capacity to onboard client selected administrators and custodians. Valuation is provided by the custodian based on an agreed price matrix that defines specific vendors (FT Interactive data, Bloomberg, Markit) for all security types. Deutsche AWM has a dedicated local pricing committee for resolution of inconsistency and lack of market liquidity. The effectiveness of the operational procedures is evidenced in the ability to handle complex, bespoke mandates, with no material operational incidents. Communication and Client Servicing High quality client reporting Deutsche AWM has a dedicated reporting and performance measurement staff of 67. It uses Cognos for report production and handles substantial volumes of reporting. In 2016 client reporting will move to Aladdin. Reporting is adapted to the investor profile and distinct needs particularly on accounting related reporting, i.e. dedicated reporting for insurance clients was in place well ahead of the January 2016 implementation of Solvency II. Clients have on-line access to portfolio positions and reports. Retail and institutional investor reporting is of high quality. Deutsche AWM is GIPS compliant. Operating Model Investment Decisions Trade Execution DeAM FO Position Keeping Client and Performance Reporting Fund Administration State Street Bank (GmbH) Transfer Agent Custody Trade Support (GlobalLink; for FX and MM Trade Execution) Source: Deutsche AWM 10

11 Technology IT Resources Deep centralised resources Deutsche AWM s IT is globally organised by the Group Technology and Operations (GTO). Resources for asset management include a total of 95 internal staff. IT used by State Street Bank GmbH, the manager s key custodian service provider, is integrated with periodic data feeds to ensure automated business flows. System maintenance framework and data network management in Germany are outsourced to IBM. The IT resources are focused on completing the implementation of Aladdin. Simplified IT Structure Aladdin (Front & Middle Office Platform) Optimus (Middleware) State Street (Custodian) SCD (Accounting) GDH StatPro LDH Reporting Systems Source: Deutsche AWM, Fitch 11

12 Technology (continued) Systems Deutsche AWM has largely completed the move to Aladdin, provided by BlackRock Solutions, as its core front and middle-office system. It simultaneously implemented Optimus as a new middleware solution. 170 legacy systems had been replaced by Aladdin, with more to follow, as of November Key outstanding items remain the implementation of the risk engine, the replacement of G-Cube and the implementation of additional report production tools. Regionally, Aladdin implementation will take place in Asia in The implementation process has been well governed and largely issue free despite the scale. Its strategic rationale is clear for rationalising the range of systems in-use and enhancing global integration Aladdin largely implemented Aladdin is now Deutsche AWM s core system. It provides full portfolio- and order-management functionality and control. It is integrated with SimCorpDimension (SCD) as the core accounting system. Some other third-party systems are still in operation notably StatPro for performance measurement and RiskMetrics for risk management. However, these will eventually be replaced by Aladdin. Charles River (the previous front office tool) was still running as of November 2015 but was due to be decommissioned shortly. G-Cube remains the core proprietary research and investment management intranet platform for group wide, real time internal communication and idea generation as of November However, this too will move to Aladdin, in Deutsche AWM maintains a single, common global data hub (GDH) representing best practice in information management. It comprises client and market data and is supplemented by integrated local data hubs (LDH). A dedicated team within global operations is in charge for data quality and synchronisation of data between agents. Numerous checks are routinely performed through an integrated control framework. To ensure IT security management information system and key performance indicator reporting are reviewed in regular IT management meetings for external or internal purposes. Robust disaster recovery and business continuity planning Deutsche AWM has comprehensive business continuity and disaster recovery plans including two alternative emergency sites around Frankfurt. The process classifies events by scope and criticality and is subject to regular testing and audit surveillance. Middle-office disaster recovery procedures fall under the responsibility of State Street Bank GmbH. 12

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