German family offices and other institutional Investors value professional exchange of ideas. The challenges for these investors are similar to those of foreign family offices. On the one hand Germany has interesting selection of small and mediumed-sized family offices, on the other hand, there are organization that have achieved an above average size in Germany and Europe as a result of corporate bonds. What topics does these organization deal with? What do the think of active and passive investing? Given the current phase of low interest rates, foundations and other institutional investors are looking for investment alternatives. Markus Hill spoke for IPE Institutional Investment with portfolio manager Dr. Stefan Tilch, Deutsche Oppenheim Family Office AG, about the current conditions of the capital market and possible investment approaches. Size should not matter. Deutsche Oppenheim Family Office is Germany's largest multi-family office and one of the leading providers in Europe. It would be interesting to know whether foreign family offices are thinking likewise like the German family offices. Feedback, additional thoughts, experience or any kind of dialogue on such context is most welcome; please contact info@markus-hill.com or Mary Daute (Asst. Manager). Phone: + 49 17 66 33 66 094

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Dr. Stefan Tilch
“The classical target conflict between preserving foundation assets and
optimizing returns is a continuous challenge for foundation investors.”
(Interview – Dr. Stefan Tilch, Deutsche Oppenheim Family Office AG, 23. July 2013)
Given the current phase of low interest rates, foundations and other institutional investors are
looking for investment alternatives. Markus Hill* spoke for IPE Institutional Investment with
portfolio manager Dr. Stefan Tilch, Deutsche Oppenheim Family Office AG, about the current
conditions of the capital market and possible investment approaches.
HILL: Many institutional investors are anxious. Bonds are
seen as “safe” investments. What did lead to the significant
price losses across the bond sector during the months of May
and June?
TILCH: Until the end of May, the first half of this year
actually went relatively well for the bond segment. Certainly,
negative political news such as the Cyprus crisis or the
turmoil surrounding the Italian elections rocked the boat a
little, but for the most part, the bond environment kept pretty
steady.
At the end of May, however, things changed drastically. Chairman of the Federal Reserve (Fed),
Ben Bernanke, announced an unexpected paradigmatic change in monetary policy: starting this
year, and continuing until the middle of 2014, the Fed will gradually discontinue its securities’
purchases. Nevertheless, a fact that many market participants overlooked was that this
announcement was dependant on a number of economic requirements which are not necessarily
going to come true. Yet, it did lead to far-reaching consequences for the global bond markets. An
unexpected, strong sellout across all bond classes happened. For instance, within a few weeks, the
return rate of ten-year US treasuries increased quickly from 1.6% to 2.6%. The return rate of ten-
year government bond reached a new annual high of 1.81% at the end of June.
HILL: These circumstances, for example, lead to the ten-year government bonds top loss of 3.5%.
For foundations in particular, which base their plans on annual payouts, this was a bad surprise.

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TILCH: I believe most market participants were caught off guard by the extent of the rate hike. At
the end of June, the situation had calmed down so that most bond portfolios closed the first half of
the year with a “red zero.” Even the Fed seemed to have been caught by surprise by the intense
market reaction, and they scaled back their rhetoric. Obviously, a quick rate hike can’t be in the best
interest of the Federal Reserve because it may threaten or offset the real estate market recovery.
Nevertheless, this event also had an advantage, since bond investors had become a little too self-
satisfied. Institutional investors in particular focused on new issues and most bonds received partly
unreasonable gains. Issuer or liquidity risks were largely ignored.
HILL: What is going to happen next for the bond markets?
TILCH: We expect a slight recovery of the bond markets in the weeks to come. From our
perspective, a number of reasons suggest a decrease in return rates. Initially, the US economy faces
its own challenges. Results of the budget sequestration on the national level have only taken full
economic affect since the second quarter. Unemployed people who have resigned and given up on
the labor market make up a quiet reserve; these people are beginning to look for work due to an
improved economic outlook. The world economy develops slower than anticipated this year.
Especially China’s growth is below expectations. In Europe, most indicators point toward a base
formation so that the coming months may bring slight economical revival. Average growth rates for
Europe, however, continue to be out of reach for now. These circumstances have caused the
European Central Bank (Europäische Zentralbank, EZB) to announce that interest rates in the Euro
zone will remain at their current levels for some time to come. These factors suggest decreasing
bond rates and recovery of most segments. Yet, this does not change the fact that the Federal
Reserve has set a rate change in motion that likely leads to an increase in rates about 6 to 12 months
from now.
HILL: But doesn’t this mean that corporate bonds have an even higher risk than government
bonds? After all, corporate bonds have had even greater losses over these past weeks…
TILCH: The announcement of the Federal Reserve has also lead to significant global market
declines of corporate bonds. Corporate bonds were hit twice as hard: For one, market prices
decreased due to the general rate increase; secondly, extension of the credit risk premiums resulted
of additional losses. This development is concerning because in the years 1987, 1994, 1999, and
2005, a strong rate increase lead to a decline of credit risk premiums, which in turn resulted in a
relative outperformance of corporate bonds. In the past, it was crucial how quickly the rate increase
occurred. A sudden rate increase like this year’s hits corporate bonds twice has hard. If one assumes
a moderate rate increase for the second half of the year, corporate bonds will become attractive once
again.
HILL: In the current market environment, are Exchange Traded Funds (ETF) for corporate bonds
an alternative to individual securities for institutional investors?
TILCH: Basically, ETFs offer a broad, diversified bond portfolio with a low cost structure. Yet,
they do have disadvantages. Most ETFs continue to be synthesized copies of the reference index.
From the point of investors, this means that in addition to credit and market risks of the ETF, they’ll
have to consider a counterparty risk, since the index reproduction generally happens through third
party swaps. Their financial standing remains unknown to the ETF buyer; he or she therefore can’t

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assess the associated risk. ETFs with physical replication/sampling method of the reference index
are thus preferable from our point of view.
Another risk factor is the so-called “survivorship bias.” It suggests that insolvent titles are removed
from the reference index and that the index’s return rate is overwritten. Next to this, another
phenomenon exists, increasing the risk of ETFs in comparison to individual securities. A new study
conducted by the EDHEC-Risk Institute on the topic of “Corporate Bond Indices” indicates that
there is a conflict of interest between issuers and investors during the composition of indices.
Issuers are likely to use low rate bonds with longer duration and vice versa. Therefore, a respective
ETF in a low rate environment will exhibit a significant longer duration and vice versa. This greatly
increased the duration risk from the point of view of the investor; duration control will thus be
offset. Thus study furthermore suggests that there is an opposition between market liquidity of an
index and its duration stability. This means, a broad, diversified corporate bond index is generally
illiquid and vice versa. Investors should be aware of these risks, if he or she plans on using ETFs to
supplement their bond portfolio.
HILL: How should foundations react to the current low interest environment?
TILCH: The classical target conflict between preserving foundation assets and optimizing returns
is a continuous challenge for foundation investors. Beginning with the return rate goal of “3% after
cost plus real capital preservation” exceeds the return rate potential of most bond segments in the
current market environment. Next to the use of bonds for asset investments, additional return rate
sources need to be developed. Stock shares are an important part of asset allocation, even though
their share is limited by the risk tolerance of most foundations. Next to stock investments, active
asset management is a key factor to reach a suitable target return rate.
HILL: Shouldn’t foundations focus on passive strategies when it comes to their asset management?
TILCH: Passive strategies can be an alternative if the foundation management has relatively free
reign in terms of their investment decisions and if they have the necessary experience to implement
passive strategies. Many foundations are managed based on individual sustainability criteria. If the
foundation’s assets are invested in an index, there is always a risk that the index includes titles that
do not meet the set sustainability criteria. Numerous foundations have additional limitations in light
of issuers, valid minimum ratings, or duration. Based on experience, most indices include individual
securities that violate investment regulations. In such a case, the foundation board members must
consider whether the chosen investment strategy meets regulations. So-called foundation funds
offer a good alternative because they are managed based on sustainability criteria.
HILL: What expertise do you have in foundation management?
TILCH: Since the beginning of the 1990s, we provide services for foundations in terms of asset
investment and strategic planning. In addition, we counsel foundations and other non-profit oriented
investors in the area of asset strategy, management, and controlling/reporting. At this point in time,
we care for the asset investment needs of over 20 foundations. Total volume equals about 500
million Euros. We offer individualized asset management for foundations starting at 5 million and
going up to 10 million Euros. Besides, we direct two mutual funds as standardized asset

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management which are a good fit for small to midsized foundations and are also managed based on
clearly defined sustainability criteria.
HILL: Many thanks for the detailed information. Obviously, there is healthy competition going on
here, even in the area of family offices. In terms of mutual funds, there are numerous interesting
offers for foundation funds or “asset managing approaches.” In the meantime, a small fund advisor
and fund selector industry is developing. Interestingly enough, you also offer solutions for “small”
foundation assets. Talking to different family offices, one notices an increasing flexibility towards
target groups and investment volume. Many small to midsized foundations may be able to find new
partners, both nationally and internationally.
Feedback, additional thoughts, experience or any kind of dialogue on such context is most
welcome; please contact info@markus-hill.com or Mary Daute (Asst. Manager). Phone: + 49
17 66 33 66 094
Markus Hill
Markus Hill (MSc in Economics) is an independent asset management consultant based in
Frankfurt, Germany Professional experience includes SEB Bank and Credit Suisse Asset
Management. In addition, he worked as head of sales and PR for a German fund boutique. Since
2005 he specialized in the management of mandates, sales, marketing, and PR (consulting,
"introducing"). Markus is also involved in selecting themes in the specialist areas of target funds
with a multi-management aspect, fund boutiques and mutual funds for institutional investors
(product scouting, fund selection). Furthermore he is actively engaged in cooperation with the
market-leading Private Label Funds/Master KAG in Germany (Universal-Investment) promoting
the idea of independent asset management and was the Co-Initiator of the first all-German
Consultant survey in 2005 and the first "UCITS-survey" in 2003. Market entry into Germany,
behavior of fund selectors and fund providers in German asset management industry are often
discussed by him, e.g. in his asset-management-publication MH-Focus. Through many articles,
columns and presentations (national and international) he has become a highly recognized expert in
the German asset management industry. "Industry multiplier" is a term often used by journalists and
clients to describe his style and personality. (Markus Hill/ MH Services assigned in the role of
Media Partner for: UCITS Alternatives Conference in Zürich, September 2011)
Markus Hill MH Services
email: info@markus-hill.com
website: www.markus-hill.com
phone: 0049 (0) 69 280 714 mobile: 0049 (0) 163 4616 179