Gustav Holtkemper: Wealth takes entrepreneurial spirit

Jean Paul Getty, the American oil magnate and patron of art, who died in 1976, hit the nail on the head: “There is only one way to build up real wealth for yourself: You have to start your own company.” In saying this, Getty was referring not to the appro­­­priate legal form, but to the right mental attitude. Because thinking and acting according to good business principles is essential for success – not only in busi­­­ness but in private, too, when it comes to the best possible solutions for one’s assets.

A businessman’s diary is almost always full to bursting. Decisions regarding private assets often have to be delegated – even in increasingly uncertain times in which managing assets requires more at­­tention than usual. With highly fluctuating markets, rising inflation and interest rates at a historic low, just maintaining the real value of assets can be a full-time occupation. Furthermore, family compa­­nies in particular are subject to many interactions between the business and private sides of things. The strategic orien­­tation of assets is a double challenge here, as convincing solutions with a holistic view have to be found for both private and busi­­ness aspects.
Interfaces between private assets and business-related financial management are found in areas such as liquidity man­­agement, investment financing, business investments, property investments, com­­mercial property, shareholder loans, pen­­sion allowances and, of course, in topics related to succession and endowments. Ideally, double supervision is used here, offering crucial added value for the busi­­nessperson. Private and business-re­­la­­t­­ed asset aspects can be recorded and coordinated with each other in a targeted way, taking the interfaces and interactions into account. Well-thought-out double su­­pervision is essential if the asset compo­­nents of a businessperson are to be allo­­­­­­­ca­­­ted according to need.

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Optimising investments with the right financing. Financing is just one example of the many parallels between private assets and business finance. Should the assets be expanded with the company’s own liquidity or by accepting borrowed capital? Borrowed capital allows investments to be made regardless of the com­­­­pany’s own means. A clear argument in favour of this option is that returns from existing equity, known as return on equity, are increased: a benefit which many com­­­­panies make use of. This is in contrast to interest payable and repayments due from borrowing, which limit financial flexi­­bility. The crucial criterion for using bor­­­rowed capital successfully is therefore to ensure that the total return on an in­­vestment is always higher than the finan­­cing costs. The low interest rates at the moment mean that this is often the case. Investigating and making use of fi­­­nancing with borrowed capital is therefore es­­pecially recommended at the moment.

When financing exclusively with equity, it is important to note that this “buffer” may then not be there when needed. Re­­gardless of this, it may also be necessary to use equity because the borrowed ca­­p­­ital needed for an investment project may only be provided if this is the case. This brief overview alone shows that there are no hard and fast rules when it comes to the right type of financing. In a company, it always depends on the financial situation, the effects on the balance sheet and the period, volume and purpose of the fina­­n­­cing, the expected return on investment and, last but not least, tax-related aspects. Various points must be taken into ac­­count for private investments. Parti­cu­larly when acquiring properties leased to third parties, there are many options for optimising the returns on the equity contributed using the right combination of borrowed capital and equity. On the one hand, this protects assets for any future investments, while on the other, bor­­rowed capital leads to increased in­­vestment costs through the deduction of interest on debt, and can therefore have fiscal effects. The favourable interest rates at the moment also offer the ideal conditions for using borrowed capital to invest in expanding private assets or for secur­­ing interest from current loans in advance for subsequent financing.

Stress test for assets. The risk mentality of the German business community is currently predominantly conservative, as the euro crisis is keeping us in suspense and the markets are very volatile. The focus is therefore often on the primary goal of avoiding risks as far as possible and maintaining private assets. However, given the extremely low interest rates and rising inflation, this is certainly a challen­­g­­­ing task, and one which can only be achiev­­ed with effective risk management. In Asset Management at Commerzbank, active risk management starts with the very first structuring of a customer portfolio. In order to answer the question “what would happen if…?”, an individual stress test is need­­ed for assets as part of active and systematic risk management. Com­­merz­­bank has committed to this as a conser­­vative asset manager. One possible ques­­tion might be “How would my portfolio perform, for example, in a situation like that of the Japanese crisis of March 2011, and how would it react if a bubble were to burst, such as when the dot-com market collapsed in 2000?” It is not only in­­sti­­­tutional investors who ask this ques­­tion. Identifying and evaluating possible risks is the starting point for the com­­­plex simu­­lation of historic and hypothetical extreme situations and their ef­­fects on the perfor­­mance of the cus­­tomer portfolios managed by Commerz­­­bank Asset Manage­­­­me­­nt. A stress test like this investigates possible risks such as the market price risk, liquidity risk and issuers’ risk. This ensures that an over­­view of all asset com­­ponents and their sensitivity to risk is available at all times, so that decisions can be made objective­ly and as rationally as possible in ad­­­vance, before im­­­mediate action needs to be taken when an unexpected situation arises.

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However, it goes without saying that res­­ponsible asset management does not limit its consideration of the risks to the time the portfolio is constructed. Instead, risk management becomes an integrated and central building block in the entire investment and portfolio management process. The portfolio structures, trans­­­ac­­­tions and adherence to the individual in­­­vestment guidelines are constantly mo­n­­i­­tored using automated checking processes and computer-supported simulation techniques. This infrastructure allows the asset managers to make use of crucial advance information, especially if ex­­­treme situations begin to arise, while the transparent structure and product implementation allows flexible and targeted action. If the internal risk traffic lights turn red, the portfolio managers can, for example, immediately reduce the share quota significantly or even sell all risky shares.

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Large fluctuations in value are part of the new reality on today’s capital markets. Despite the best risk management instru­­ments, even asset managers cannot predict weak phases and fully-fledged crises of tomorrow entirely accurately. With the help of an active risk management strategy, at least they are excellently prepared to protect their customers’ assets from the negative consequences as well as possible. Holistic consideration is especially recommended in the case of multiple port­­folios, in order to recognise and eliminate any correlation risks.

Larger assets not only provide more room to manoeuvre, but also have greater ma­­­n­­agement requirements. The most recent crises have made this more than clear: “buy and hold” has served its time as an easy strategy. Instead, it is now necessary to spend a lot of time considering macr­­o­­­economic contexts and a huge variety of products. In challenging market situations in particular, individual asset ma­­­n­­agement tailored to customer requirements offers a crucial advantage: dele­­gating their investment decisions not only saves investors valuable time, but their assets also benefit from the super­ior speed of the asset managers. After all, in this economic environment, flexibility and fast reactions are the key to counter­­acting unfavourable market developments in good time.

37Born in 1960 in Rheine, Westphalia, the author is group executive manager of Wealth Management at Commerzbank AG. Before joining the Commerzbank in 2006, the qualified bank clerk was Chair of the Executive Board of Deutsche Bank Privat- und Geschäftskunden AG, Berlin region. Holtkemper is married and has three children.