For years, Allianz (ETR:ALVG), one of the world’s biggest investors, piled billions into property, wind farms and even London’s sewage system, but now it is moving to shun such “alternative” investments for plain vanilla bonds, people with knowledge of the matter said.
The German company’s new approach comes amid a sea-change in the investment environment, with central banks raising interest rates to clamp down on runaway inflation, prompting higher yields on mainstream assets, the people said on condition of anonymity.
They stressed that the reallocation would be gradual and not result in fire sales, with new money going largely into fixed income rather than alternative investments.
The move by Germany’s biggest financial company by assets and market value provides evidence of a significant shift towards the multi-trillion dollar market for investment-grade bonds, which keep governments afloat and pensioners fed, and away from alternatives that juiced returns in an era of ultra-low and even negative interest rates.
For Allianz, the repositioning also coincides with efforts to restore its reputation after paying some $6 billion in fines and settlements announced last year for fraud in the United States. This resulted in part of its U.S. asset management business agreeing to a guilty plea for the conduct, something its own lawyers said was the equivalent of a “death penalty”.
One of the people noted that Allianz’s solvency ratio – a measure of financial strength – had suffered in the wake of the funds debacle and that the new investment approach could help restore it.
Giulio Terzariol, Allianz’s chief financial officer, shed light on the company’s rethink in November when he told analysts on a conference call: “The value proposition of fixed income is much more compelling compared to a few years ago … it’s a different game”.
Allianz’s results, due on Friday, will give an annual update on the company’s investment mix.
A global insurer, Allianz ranks as one of the world’s biggest money managers with 2.6 trillion euros ($2.79 trillion) in assets under management via bond heavyweight Pimco and Allianz Global Investors, whose U.S. unit managed the funds at the centre of its recent scandal.
Allianz’s foray into alternatives began when Michael Diekmann, now group chairman, was CEO. In a speech on his last day in that job in 2015, he complained about potholes on roads between Salzburg and Munich, highlighting the need for infrastructure investments. He pledged Allianz would grow so-called “real asset classes”, that included infrastructure, from 80 billion to 110 billion euros.
Since then, Allianz has increased its alternative investments by 350% to more than 200 billion euros, while fixed income investments rose 40% and equities 30%, based on Reuters calculations using Allianz financial statements.
Among the big buys were the stake in London’s new sewage tunnel, and wind farms from the United States to Finland.
Real estate, which makes up the bulk of Allianz’s alternative investments, included around 700 million euros in stakes in New York’s Hudson (NYSE:HUD) Yards complex, and a tower in Frankfurt that is part of a property development worth 1.4 billion euros.
But with the change in the investment climate, Allianz is looking for opportunities to shift new money into other investments like fixed income, the people said.
Annette Kroeger, CEO Europe for Allianz Real Estate, said her division has a “wait and see” approach for property. “We look ahead, like the rest of the market, with caution,” she told Reuters.
In a sign of the changing times, even yields on bonds in Japan have been edging higher on speculation that the era of ultra-easy monetary policy is coming to an end.
Allianz is not alone in rethinking alternatives. Goldman Sachs (NYSE:GS)’ asset management arm is planning to significantly reduce its $59 billion of alternative investments.
Credit rating agencies Moody’s (NYSE:MCO) and S&P, which both give Allianz high marks, have pointed to the greater risk posed by comparatively illiquid alternative investments in Allianz’s portfolio.
Alternative investments come at a price, requiring Allianz and other insurers to set aside more capital to own them because they are less liquid than bonds.
Allianz hopes, some of the people said, the shift will help to improve its capitalisation and solvency ratios that track how the company would fare during a crisis.
Allianz’s so-called Solvency II capitalisation ratio – a key gauge of financial health – dropped from 229% in 2018 to 199% at the end of the third quarter of last year, based on Allianz’s financial statements, in part because of the fines and settlements for the U.S. fund fraud.
The case came to light after $11 billion in funds collapsed as markets roiled with the outbreak of the coronavirus in early 2020.
The U.S. prosecutors alleged that the fraud included fake documents, fabricated risk reports and altered spreadsheets.
Among the $6 billion in settlements and fines, Allianz paid $1.49 billion to one of its big investors, Blue Cross Blue Shield, in an effort to “generously” compensate, based on a presentation Allianz lawyers made to the U.S. Department of Justice last year, which was made public in a court filing last month.
A lawyer for Blue Cross Blue Shield declined to comment.
In the same presentation, Allianz lawyers argued that the guilty plea that Allianz eventually agreed to for the U.S. business was “a death penalty for a registered investment adviser”.
In its wake, Allianz has had to close down Allianz Global Investors in the United States in a serious blow to the company.