Mr. Ralph, Allianz's asset management can look back on a strong year. What do you think lies ahead for the next five years?
Jay Ralph: It was, in fact, a record year with an operating profit just shy of €3 bn. We aim to achieve net inflows of new funds averaging 5% to 10% of the assets under management p.a. over the market cycle as a whole. In five years' time, our division could have boosted its contribution to the consolidated result from 28% to around one third.
And you'll be sticking with the two-pillar structure - Pimco und Allianz Global Investors (AGI)?
Yes, we have not lost one single client due to the new structure and customers can make a choice.
Do you plan to make any acquisitions?
Our focus in the asset management business is on organic growth. I don't see any need at all to make acquisitions either at Pimco or at AGI. On the other hand, we cannot rule out a scenario in which we will look for outstanding talents for areas like emerging markets or alternative investments, for example.
What is currently the biggest challenge facing asset managers?
The financial repression and the unsolved question as to what will happen when the central banks stop buying bonds and other securities. This could be a sort of "cold turkey" situation. We simply do not yet know what it will really mean for the markets. The risk gets bigger with every additional year in which the central banks intervene.
What sort of things are you worried about?
Asset bubbles. The problem is likely to be less one of inflation in the real economy and more one of money supply inflation. What will happen to the price of the securities that the central banks have been buying to date? There is no doubt that the interest rates will rise if there are fewer buyers. But I don't think we can expect the central banks to withdraw completely over the next few years. The growth prospects are simply to poor to allow this.
Where do you believe that valuation bubbles are lurking?
The high liquidity means that there are probably bubbles in quite a few asset classes, probably across the board. The difficulty lies in finding the highest relative value. Assuming that all other things remain equal, the change in the value of real assets is more pronounced. Be it real estate, infrastructure, renewable energy, metals or other commodities. High-quality shares are another very attractive segment.
The Italian elections have triggered another wave of anxiety, do you think this is justified?
Without closer fiscal and economic union, European Monetary Union is unlikely to become strong. The central bank has merely bought time. So far, mere announcements have been enough. It will take a decade to implement reforms, and this creates problems. And it is important not to slash the debt ratios too quickly, because growth would then suffer as a result. On the other hand, some countries need to get their debt back to a manageable level.
What risks do you think arise as a result of the revolts in the Middle East and North Africa?
Allianz does not have much money invested in this region ( ALV111,251, 0.36%). Investments in the region are also low in terms of global capital. But the potential for turbulence is significant. An escalating political or military conflict in this region, which is crucial for energy supplies, would be a major shock for the markets. The European and US economies are just getting back on their feet after a period of low growth rates – the recovery is a fragile one.
What does this mean for investment strategy?
The difficulty lies in achieving a satisfactory return. The solvency regulations mean that there is an ever-growing trend towards long-term fixed income investments. The situation is compounded by demographic change. If more people start reaching retirement age, assets will tend to be shifted from equities to bonds. We are witnessing an ongoing trend: the transfer of our customers' funds to more complex investments, mainly towards multi-asset strategies.
Do you share the view that we are seeing a prolonged shift from bonds to equities due to the looming risk of inflation?
In view of the zero interest rate policy, the dividend yields for high-quality shares exceed the bond yields. This means that equities are looking more attractive than bonds. We are witnessing more of a focus on equities at Pimco and AGI at the moment. In terms of the portfolio as a whole, the equity position managed directly by Pimco is still relatively low, but there are a large number of strategies that combine bond and equity strategies. This part of the business is growing fast.
So does the environment actually allow for an increase in the valuation multiples for equities?
In a stable recovery scenario, it certainly would, this would be what we would expect. But we must not forget the interest rate development.
