DWS Goes Home for Help

DWS' stewardship has improved as it's grown closer to its German asset-management roots, but there's still room for improvement.

DWS is an asset manager that has grown largely via acquisition, but more recently, it has turned inward. It has shifted the management of some key mutual funds to the asset-management operation of parent company Deutsche Bank DB in Frankfurt, Germany. (DWS in America and Germany are both part of Deutsche Asset Management, but they used to operate independently.) Since 2007, when DWS Large Cap Value KDCAX was moved to a German management team, 10 equity funds have switched to Frankfurt managers with proven track records. For example, DWS in Germany already sold U.S. large-cap funds to European investors so the managers of those funds duplicated the strategy for U.S. investors. Meanwhile, U.S. small-cap funds, such as DWS Small Cap Growth SSDAX, and all the bond funds for U.S. investors are still managed out of DWS' American offices. DWS says it's more difficult to do the necessary research for those strategies from such a long distance.

This transition is likely to benefit shareholders over the long haul. The investment culture of the Frankfurt office is much stronger and more cohesive than that of DWS Americas, which was cobbled together through a series of acquisitions. The resulting investment culture was uneven and inconsistent, and DWS has struggled to improve it ever since. Arguably, that lack of a cohesive culture contributed to the firm's regulatory lapses and unimpressive performance.

Calling in a Veteran Squad
Meanwhile, DWS in Germany has been managing mutual funds for 50 years. The firm prides itself on an equity investment style that combines top-down macroeconomic research with bottom-up stock-picking, and it has developed a reputation for good macroeconomic insight. The firm's leaders are well established. Klaus Kaldemorgen, chief investment officer in charge of equities since 2005, started at DWS in 1982. Top managers like Volker Dosch, who manages U.S. equities, and Thomas Gerhardt, who leads the effort on emerging-markets equity, have been with the firm since 1989 and 1994, respectively. Such retention of talent has helped the firm build a culture focused on collaboration and teamwork.

The firm tends to hire portfolio managers upon graduation from a university, steep them in the culture, and train them as analysts for several years before giving them money to manage. This fosters firmwide adherence to a well-defined and repeatable investment process. DWS' decision to leverage that culture in the United States signals recognition by the firm's executive management that a strong, cohesive investment culture is crucial to growing a successful asset-management business.PAGEBREAK

Sticking to Its Knitting
DWS has made other shareholder-friendly moves, in addition to relying on its stable German investment team. To start, the U.S. fund lineup has been consolidated substantially. Through mergers and liquidations, DWS shed 17 of its open-end and insurance funds. Firm management also slowed the pace of new fund launches significantly since the mid-2000s, when it launched a bevy of new funds; some, such as DWS Climate Change WRMAX, offered trendy mandates and marketing spins but little investment necessity to shareholders. The consolidation, plus the slowdown in new fund launches, has led to a 15% reduction in retail offerings. With a leaner lineup, management should be better able to focus on the firm's core competencies and foster economies of scale that can be passed down to shareholders in the form of lower fees.

While the long-term impacts of these organizational shifts range from neutral to positive, the consequence in the near-term has been extreme manager turnover. Roughly one third of funds in the lineup were taken over by new management in the past three years; one-fourth have had the same manager for less than two years. Granted, not all turnover is bad. DWS' lineup has been dogged by lagging performance for many years, so one can easily argue that management changes were necessary. But simply put, such fluctuation makes it difficult for shareholders to be comfortable in these funds.

The fixed-income side of the business represents another nagging problem. To be sure, some of the funds are easy to recommend. The municipal funds managed by Phil Condon, for example, have solid long-term track records, and DWS GNMA SGINX, led by Bill Chepolis, offers a good risk-return profile.