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Exit interview: DWS's Udo Behrenwaldt steps down

After more than three decades in the business, Behrenwaldt, a managing director of the firm since 1975 and CEO since 1999, is retiring. His successor: global head of fixed income Axel-Günter Benkner, a 22-year veteran who has served as head of fixed income and portfolio analysis.

Today the Deutsche Bank subsidiary still ranks No. 1; its 347 funds report assets of E92 billion ($92.1 billion). After more than three decades in the business, Behrenwaldt, a managing director of the firm since 1975 and CEO since 1999, is retiring at the end of the year. His successor: global head of fixed income Axel-Günter Benkner, a 22-year veteran who has served as head of fixed income and portfolio analysis.

Born in Berlin in November 1941, Behrenwaldt graduated from Frankfurt University in 1966. In 1970 he joined Madrid-based boutique Formula Selection, where he developed an expertise in the fledgling art of global investing. He was a pioneer investing in Japan along with industry legend Sir John Templeton.

At DWS in the 1970s and '80s, Behrenwaldt managed international equity portfolios, and in 1987 he helped establish a cross-border fund business in Luxembourg, a strategy imitated by other German investment managers. Additinal products that DWS introduced to the German market include money market funds, which were launched in 1988, and funds of funds, which premiered in 1999. DWS now operates in five other European countries and claims a pan-European market share of 5 percent.

Currently, DWS is one of the few money managers holding its own in a bear market. Despite a 50 percent drop in German stock prices, funds under management this year have been stable. Even in equities the firm recorded net inflows of E7 billion in the first half of 2002 -- nearly all the money German investors have put into the asset class. Market share in Germany has actually gone up from 23 percent in 2000 to 26 percent today. Since Standard & Poor's began rating German and international fund groups in 1995, DWS has consistently ranked among the top-performing fund managers across one, three and five years.

Deutsche Bank hopes that the DWS magic will rub off on its other European retail funds, which have combined assets of E122 billion. This summer DWS Investments became Deutsche's pan-European retail brand, a fitting monument to Behrenwaldt's accomplishments at the firm. Institutional Investor Senior Editor Andrew Capon spoke with Behrenwaldt about his life and career.

Institutional Investor: What do remember of your early childhood in Berlin?

Behrenwaldt: [In June 1948] the Russians closed the city. The American and British airlift saved West Berlin, and it is a very vivid memory for me. We lived very close to Tempelhof Airport. Every few minutes these prop planes would come in 50 or 100 meters above our house. The Tempelhof airstrip is relatively short. Just before the airplanes land there was a graveyard. Some of the pilots used to throw out chocolates. My friends and I used to stand in the graveyard jumping around, shouting to the pilots and catching the chocolate.

To what would you attribute DWS's success?

Without performance, there is very little point even trying to compete in this business. We have a long track record of innovation. That has certainly helped us to maintain our market share. Flexibility and speed to market are other traits I would emphasize.

Are you leaving DWS in safe hands?

I am. Axel Benkner has been part of the management setup here for many years. If you look around at the senior people at DWS, you will find a company that has extraordinary continuity. I would be happy to have it compared to any industry peer. I will stay on as an adviser to the group and will become vice chairman on a part-time basis. It would be egotistical of me to pretend my departure will be a great cause of concern. It will be business as usual.

What is the relationship between DWS and Deutsche Bank?

It is a family relationship. DWS was created in 1956 when the government first enacted a law allowing for the establishment of fund management companies. Deutsche took about half of the ownership, and the rest was split between a dozen private banks. Today Deutsche Bank owns a 94 percent stake in DWS. We feel part of Deutsche Bank group. However, we have always had separate premises. That distance and indepen-dence is important as we are a fiduciary and our first duty is to our clients.

Does the increasing integration of Deutsche Asset Management and DWS threaten that?

The bank created the asset management division in 1998 under Michael Dobson. When Michael formed the division, he was of the view that the retail and institutional businesses should move closer together and work from a common infrastructure platform. Then and now I thought this was plain, simple common sense. That process got delayed when Deutsche Bank decided to sell DWS to Allianz in March 2000, though it never actually happened. (Later came the proposed merger between Deutsche Bank and Dresdner Bank, which eventually collapsed.) Next March DWS and Deutsche Asset Management will be under the same roof in Frankfurt, and that will be the final point of integration as far as infrastructure is concerned. What will remain separate is fund management for retail products and institutional products.

Were you insulted that former Deutsche Bank speaker Rolf Breuer wanted to use DWS as a dowry for Allianz in 2000 so he could get a deal done with Dresdner?

No. Allianz is a first-class company. And it was rather a compliment to us that we were such a prized piece of the deal.

What is the legacy of German reunification? Did emotion get the better of economics, and is Germany now paying the price?

I think that is broadly true. But you have to judge this in its historical context. I am 61 years old. My generation is still emotionally and intellectually embedded in German history. We are a generation that is passionate about European stability and a unified Europe. We have felt the need to overcome the antagonism between France and Germany that disfigured the 20th century. People in Germany saw reunification from a nationalist and emotional perspective. There were tears. But at the same time, it was clear to my generation that this was more than a national event; it was a European event. It required the consent of France and the U.K., prime minister [Margaret] Thatcher and president [François] Mitterrand. That is why the introduction of the euro is an equally great event. It showed that Europe had left its history behind.

So you see the introduction of the euro as the culmination of a post-cold-war European settlement that began with German reunification?

The decision to join the euro was difficult for Germany because the strong deutsche mark was a symbol of postwar stability. Again, my generation remembers stories of the hyperinflation of the 1920s and 1930s. If there had been a vote in the late 1990s asking Germans if they wanted to convert deutsche marks to euros, the vote would have been no. The politicians just pushed it through. But even now, just a few years in, I think most Germans would say it is a blessing that we have the euro and a closer European union.

Does Germany's economic downturn threaten the banking system?

I don't think the German banking system is in danger. Clearly, banks are not making profits. But the German banking system has been very stable compared to France, where Crédit Lyonnais needed the government to intervene to save it. The Japanese banks are in a very bad way. I think it is hard to say there is a banking crisis in Germany. But it is almost impossible for German banks to make any sort of profit on retail banking. When you compare how much money is made from retail banking in the U.K., that makes competition difficult. The reason is the state guarantee to the landesbanken. This goes away in 2005. It is a tough time -- the stock market is down 50 percent, investment banking activity has dried up, retail banking is inherently unprofitable, and the country is overbanked.

There are many floundering fund management businesses in Europe. What advice would you give their chief executives?

This business is all about performance, so as a CEO you need to keep good performers happy. That is easier when you are the biggest and the best.

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