Interview withRalf Lochmüller, Lupus alpha

Our goal is to grow our AUM faster than the market

Asset manager Lupus alpha likes to differentiates itself from its mainstream competitors. CEO Ralf Lochmüller explains its approach to Börsen-Zeitung.

Our goal is to grow our AUM faster than the market

Mr. Lochmüller, Lupus alpha wants to get involved in the retirement provision business. However, your firm is known for its specialised strategies, such as small caps or volatility. Why should someone consider you for retirement savings?

Investors in the retirement savings sector need exactly these specialised strategies to achieve better returns. And although it might not be immediately obvious, out of our assets under management totalling 15.2 billion euros, 13.2 billion euros are allocated to institutional clients. Of this, 70% are retirement investors such as pension funds, corporates and churches. This means we are already quite strong in the retirement sector and aim to continue growing here.

So, should pension funds invest in a Lupus alpha small-cap fund in the future?

Why not? The focus is on specialised strategies that can help investors achieve deeper diversification of their assets. These strategies typically come with a well-defined asset allocation that distinguishes between bonds and equities. Our role is to optimise that.

You cannot reinvent capital investment for pension funds, and other fund types. Isn’t it always about having a sound structure and a good strategy?

Institutional capital investment has changed significantly in recent years. Previously, you could categorise investments as equities, bonds, or mixed portfolios. There has been considerable evolution since then. Many investors are now following the model of David Swensen, the former head of investments at Yale University, i.e. what the American university endowments are doing. This involves more equities, a global investment focus, and increasing investments in private markets, infrastructure, and liquid, specialised strategies.

Where do you come into the game?

Real diversification requires more than just dividing assets between equities and bonds. We might not handle the core allocation, but we offer clients attractive satellite strategies to enrich their portfolios. This includes alpha strategies or alternative risk premiums, such as our volatility strategies. These are specialised components that a retirement savings institution needs in its portfolio today.

You mentioned private markets. Lupus alpha isn’t active in that field, is it?

That’s correct; there are several specialists in the market with extensive track records. But we do offer a CLO strategy that has some characteristics of private market debt. We currently manage over 4 billion euros in this area, making us one of the leading providers in Germany.

If your firm manages around 10 billion euros in the retirement savings sector, isn’t that just a small portion of the entire retirement market? Is Lupus alpha still not well-known enough?

We are a mid-sized provider with, in my view, a substantial volume. The retirement savings sector offers us enormous growth potential.

Recently, there was a discussion in Berlin about equity pensions and ways to make retirement savings more capital-oriented. Is this also a topic for you?

We strongly advocate for increasing the capital markets orientation of pension savings. This is the only way to achieve reasonable returns. Supporting any move towards equities is something we stand behind.

But you’re beating the drum alone, and are still not a member of the fund association BVI, which is very active in lobbying over pensions.

As a mid-sized asset manager, we must focus our resources efficiently. We consider the work of the BVI to be very valuable and maintain close communication. However, effective lobbying also requires significant personnel resources on our part.

You mentioned the low returns. Do you have an example?

Take my own case. I’ve been promised a monthly pension of 1,500 euros from my pension scheme. It’s not insignificant, but it could be much higher. The return on such a corporate pension might be 3 to 4%. If it were 6 or 7%, the pension would be significantly larger.

Is the low return of corporate pensions the only issue?

Currently, around 53% of people are entitled to a corporate pension. The percentage has increased, but it’s still not enough. We need to aim for 70%. That’s why we advocate for it. Corporate pensions are extremely important, because statutory pensions alone will not be sufficient. In this sense, our work and our strategies for pension funds contribute to ultimately making older people happy. I always tell our employees that working at an asset management firm is a very meaningful task.

Let's look at the third pillar of private savings. It is often said that one should start early, ideally even setting up savings for children from a young age. What should one do for children?

Why not invest 200 euros a month, split equally between „Lupus alpha Smaller German Champions“ and an MSCI World ETF? I’ve calculated that with a 6% return, you’d have over 400,000 euros after 40 years. Compare that to the statutory pension.

When the children turn 18, they might spend it on a sailboat. Everyone is the architect of their own fortune. How do you prevent that?

Financial education is key. Young people need to understand the importance of building capital and starting with a high equity share. What’s encouraging is that the number of young people investing in equities has doubled in the past decade. I see the glass as half full.

For wealth management, diversification is the keyword. You have perfected this in your own company with six product areas: small & mid caps, convertible bonds, CLOs, volatility, value protection, and risk overlay. Isn’t the portfolio a bit haphazard?

It has grown organically. There are connections between strategies, even through people who work with us or have joined us. Some of this is related to regulatory developments like the Investment Modernization Act of 2004, which first gave access to single hedge funds. That was the start of our derivatives strategies. For us, it’s important to offer only strategies where active managers have an advantage and to build a track record, which we then can convincingly present to clients.

What’s next? Where do you see Lupus alpha in the next ten years? Will you be acquired, or do you plan to grow through acquisitions?

Of course, we receive such inquiries from time to time, but it’s not on our agenda. We started as a stable partnership over 20 years ago, and nothing has changed. We want to continue growing organically within this structure, and remain committed to our performance-oriented approach.

Can you quantify the growth?

Our goal is to grow faster than the market. We aim for a 7% increase in assets under management per year, which is about twice the average rate.

Where is the new demand coming from?

Many of our investors are internationally positioned and well-diversified. But their portfolios are still vulnerable to setbacks, or must adhere to strict regulations, such as those faced by insurance companies. Nothing is more expensive than having to abandon a strategic asset allocation and drastically reshape a portfolio in a crisis. For such situations, we offer overlay strategies. We see a significant demand for these.

Others do that too. What makes your approach different?

We have a different concept compared to large master KVGs. Many investors are disappointed and therefore turn to us. Our approach is to leave the strategic allocation unchanged, and offer a modular approach that combines various hedging instruments, such as a tail-risk parachute or an income booster that leverages the long-term upward movement of equities, and thus significantly reduces costs.

Are customers flocking to you?

Such strategies are very complex and often require one to one and a half years of engagement. Thus, we might gain one or two clients per year. But they tend to stay with us for a long time.

More growth means more employees. Where do you find them?

Finding good people is challenging. However, we are doing well in portfolio management and sales, and are always open to talent. Recruiting in IT is currently very difficult. Many candidates are put off by our predominantly office-based work, with only one day of home office. Overall, we benefit from a large network and from our students, who recommend us or join us as junior professionals.