Thorsten Winkler, fund manager at Veritas Investment Trust, spoke to IndexUniverse.eu editor Paul Amery earlier this week about the challenges involved in building an ETF-focused fund of funds business in Germany.

IU.eu: Thorsten, how widely used are ETFs in the German savings market?

Winkler: For the average German retail investor bank-issued certificates are still most widely used to track markets and market indices. They are popular with the banks as the certificate structure allows them to charge lots of hidden fees. Retail interest in ETFs is picking up but the banks have no incentive to sell them. So the growth of the ETF industry is largely reliant on the education programmes conducted by issuers.

Also, there are more and more products coming out that wrap ETFs in an asset allocation solution. This might be an interim step to getting retail clients to use the funds more, after which they might start picking ETFs themselves. Such funds of ETFs have a management fee, which allows banks to earn something from them as well when distributing them.

In general, index-based investments are only a small part of the overall mutual fund sector in Germany.

IU.eu: So, although German banks like Deutsche Bank and Commerzbank have large ETF operations, you wouldn’t come across their products if you walked into an average bank branch?

Winkler: You’re right that many banks place emphasis on their actively managed products. You´ll have to ask them explicitly if you want to buy an ETF. But although banks don´t promote ETFs, they should make it easier for their clients to access them when they want to buy them.

IU.eu: How widely used are online stockbroking services in Germany?

Winkler: The average German still uses his or her bank branch to buy all financial products. But amongst the younger generation there is much wider use of the internet for all services, including savings products. As this generation grows older and increases its retirement savings, we’d expect to see greater use of online brokers.

IU.eu: So how does Veritas promote itself?

Winkler: We try to educate people through investment conferences, ETF roadshows, and joint projects with some of the ETF providers. Also, since we’ve recently completed our three-year performance track record and obtained a five star rating from Morningstar, the level of client interest has gone up a lot. There’s also steadily increasing interest in ETFs – it’s hard to open up a financial publication these days without seeing an advertisement for an ETF provider.

IU.eu: Your performance record since you started in 2007 has been impressive – your fund of funds is up 36% in three years, and you managed to get through 2008 with a positive return. How have you managed that?

Winkler: Our investment process is based on a technical model, primarily using such indicators as moving averages and momentum. We’re prepared to switch between 0% and 100% equity exposure and in spring 2008 we cut back our equity exposure heavily. By September we hardly had any equity funds and switched to government bond ETFs in Europe and the US. We also benefited from the strong dollar at the time.

IU.eu: So you have no human overlay at all in terms of subjective decision-making?

Winkler: Our model gives us a ranking of markets by asset class, then by regions, countries and sectors. The model doesn’t impose trades by itself, however; as fund managers, we have the final say. But having the technical input is really helpful. For example, in spring 2009, when everyone thought the world was ending, we got a signal to invest again in emerging markets. If I’d followed my gut feeling I probably wouldn’t have bought them, but on the basis of the model’s output we did.

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