Financial markets may have delivered respectable, even healthy, returns since 2009 but if part-time thriller writer Elizabeth Corley is correct, future returns may prove a little less, well, thrilling. Ms Corley, who whose day job is chief executive of Allianz Global Investors, a division of the eponymous German insurer, has grave doubts about both equities and fixed income, with the latter undermined by the fatal legacy of efforts to tackle the continuing financial crisis. “We have a very strong view that financial repression is here to stay, with negative real interest rates even in a better growth environment,” warns Ms Corley. “In a more normal inflation environment that is likely to get worse because yields become even more negative, the income we need is not going to be there.” As for equities, Ms Corley points to the effect of demographics as the baby boomer generation, which has done so much to support stock markets over the past 30 years, starts to cash in its holdings to fund retirement. “We are moving from accumulation to decumulation. That is starting in the US,” she notes.
But that is only part of the story. Ms Corley says AGI’s pension risk team has worked with the OECD to study the impact of demographics on equity markets. The latter concluded “there wasn’t a major impact”, Ms Corley says, but she adds ominously that this study was completed before the creation of “procyclical” legislation such as Solvency II and Basel III, which are likely to force insurance companies and banks respectively to reduce their equity holdings. “I think there is a structural level of de-equitisation,” she says. “Were there structural reforms in the 1980s and 1990s [that bolstered stock markets] that could happen again? There was a lot of liberalisation then but we don’t think we will get a Thatcher, Reagan, Schroder period again. “That is why we think global benchmarks are so important. The emerging markets are going through their own wave [of liberalisation].” However, Ms Corley fears even this glimmer of hope could be jeopardised by a knee-jerk reaction from developed nations. “One of the big questions is to what extent globalisation will continue, or whether we will see greater protectionism. With these ageing populations, we have got to allow these assets to flow to fund the returns. The world needs that GDP growth.”
One strand of AGI’s response to this investment dilemma is to attempt to encourage investors to look at alternatives to plain vanilla equities and bonds, such as convertible bonds, index-linked products, commodities and infrastructure. Last year it hired an infrastructure debt team headed by Deborah Zurkow, formerly of Trifinium Advisors, a subsidiary of monoline insurer MBIA, which in January unveiled plans for a groundbreaking UK fund. AGI has also assembled a renewables team and plans to launch a dedicated renewables fund covering Europe, and potentially other developed countries.
Ms Corley also believes Asian local currency and high-yields bonds offer “real opportunities”, and the company has recently strengthened its offering with a pan-Asia team based in Singapore. However, she seems less sure about the likelihood of AGI following some of its peers and launching funds that lend directly to companies, rather than simply buying their bonds. “We are looking at it but we are not doing it. We are not a bank and we don’t have a balance sheet and we wouldn’t want to use our parent company’s balance sheet to underwrite this,” she says. “We are used to investing in capital market securities. We are not arrogant, we don’t assume that we can do this. It is a different way of investing.”
The investment industry’s increasing complexity may prove daunting to many retail investors, and even their advisers. As a result, AGI says it is seeing the strongest demand for multi-asset class products where it makes asset allocation decisions on behalf of small investors. For instance, in the UK it has rolled out a family of multi-asset class managed volatility funds, dubbed Risk Master, ranging from “defensive” to “growth” options. AGI is putting its money where its mouth is by promising to refund fees if any of these funds proves more volatile than promised. “If we stray outside the target, for that quarter the client gets the product for free,” says Ms Corley. “We want to deliver the return for the risk budget. Market forces will look at performance, but the risk is always hidden. This is the same way we run our target-date funds in the US, thinking about risk-adjusted performance.”
The Risk Master funds were launched with one eye on the UK’s Retail Distribution Review, which from January 1 has forced independent financial advisers to be paid directly by their clients, rather than taking a commission from product providers. Ms Corley fears an “unintended consequence” of this legislation will be a rise in execution-only investment, as individuals shy away from paying upfront fees. She is hopeful sthe RDR may spur many investors to gain a better understanding of their options, something she sees “glimmers” of already.
AGI is itself adapting to a changing marketplace. When Allianz bought Pimco in 2000, the US bond house had just $264bn of assets under management, compared to AGI’s €366bn. By the end of 2012, AGI’s AUM had fallen to €304bn (€178bn when assets managed on behalf of its parent are stripped out), while Pimco’s third-party assets had ballooned to €1.23tn. Pimco has responded to this shift in the balance of power by growing more assertive, demanding for instance that data providers such as Lipper separate out inflow data for the two siblings in order to stop Pimco’s figures being “dragged down” by those of AGI. AGI’s cost/income ratio, at 72.6 per cent, is also far higher than Pimco’s 51.5 per cent.
However, AGI believes it has benefited from an internal shake-up that has seen Allianz’s distributors switch from selling both Pimco and AGI products to one or the other, pointing to strong sales of its US high-yield bond strategy in Asia-Pacific, which it argues would not have been possible under the old regime. If Ms Corley gets her way, there will be no requiem mass for AGI any time soon.