"Our Two-Pillar Model is a success"

What challenges does asset management face today, and how is Allianz positioned to handle them? An interview with Jay Ralph, member of the Board of Management at Allianz SE in charge of Allianz Asset Management.
 

 

Mr. Ralph, in May 2013, capital markets clearly showed how nervous they are. Is now the time for the "great rotation" out of bonds and into equities and alternative investments?
 

Jay Ralph: Government bonds will continue to constitute a large part of the overall investment spectrum. Many quality stocks do indeed look more attractive than government bonds because of their attractive dividend yield. Nonetheless, bonds are gaining in attractiveness as yields have risen. Solution-oriented strategies, multi-asset investments and alternatives continue to see growth in flows. Both PIMCO and Allianz Global Investors (AllianzGI) are well positioned in these segments. Nonetheless, many institutional investors are constrained either by capital requirements or investment guidelines and can only invest a small portion of assets in equities or alternatives.
 

Isn't the boom in fixed-income about to end?
 

You shouldn't be misled by short-term fluctuations. While the extraordinary growth in investor appetite for core bond products has been tempered as a result of a number of factors, there is an inherent demand and need for fixed income securities, both by individuals and institutions. Insurance companies, pension funds and all institutions with liability structures that require matched asset hedging need fixed income assets on the other side of their balance sheet. Additionally, investors typically diversify their asset allocation with bonds to preserve capital, generate stable income and provide low or negative correlations with equities. High-quality fixed income assets will continue to be in demand due to demographics as we see a growing number of individuals entering their retirement years during the next decade.
 

Although we are already in the midst of a prolonged period of low interest rates, there are many opportunities in the context of the global bond market. The definition of fixed income is broad and we have seen that having a solution-oriented approach focusing on a delivery of absolute return while delivering out-performance creates tremendous value for our clients. Of course, in today’s investment landscape it is also important that asset managers have the ability to offer clients a broad range of products across a wide range of asset classes to allow clients to customize portfolios to achieve their individual objectives.
 

Allianz will remain invested in fixed income despite low interest rates?
 

Of course, we continue to broaden our asset management capabilities. Nonetheless, PIMCO is a recognized leader in the fixed income segment and AllianzGI has recently invested in expanding its capabilities in Asian bonds and Global Emerging Market fixed income. PIMCO and AllianzGI know how to optimize returns through fixed income. The coupon is not the only source of income. The right mix of maturities, credit quality, and currencies can increase what would otherwise be low yields.
 

Two years ago, you announced the reorganization of Allianz Asset Management. What has been your experience so far with having two independent asset managers?
 

We were faced with the question of how to continue our success story in asset management and how to continue to meet or exceed our client’s expectations. At that time we had nine independent asset managers. We decided to focus on two: AllianzGI and PIMCO. Both are independent from one another, but both offer a full range of products from stocks and bonds to alternative investments. Interest by clients and the numbers show that we took the right step. In the 18 months since the announcement of our two-pillar strategy, clients have entrusted our asset managers with163 billion euros in new funds and managed assets have grown by 206 billion euros to 1,863 billion euros (as of June 2013). Despite the challenging environment, 28 percent of the operating profit of Allianz in the second quarter of 2013 came from Allianz's asset management division.
 

Haven't you lost potential synergies?
 

PIMCO and AllianzGI offer different value propositions. Just like a great meal has different courses, sometimes asset management capabilities are not improved by putting all capabilities under a single operational management. We are proud to have two great asset managers with two great brands. Both PIMCO and AllianzGI have the size, portfolio management and distribution capabilities to offer outstanding investment capabilities and service to their clients on a global basis.
 

The synergies that we have reached through the unified leadership and structures at AllianzGI, together with the organic growth of our business, are significant. The result is that both AllianzGI and PIMCO now have a clear profile with specific investment approaches for their clients. This strategy has worked. Our competitors have recognized that our "Two-Pillar Model" is a success. We are a stronger competitor today than we were when we had nine disconnected asset managers or if we had a single manager. Both PIMCO and AllianzGI will work to deepen their market penetration and strengthen their capabilities to serve their clients.
 

One for stocks, one for fixed income?
 

The time of boutiques is over. Clients want broad and flexible solutions and expect their investment managers to have access to different asset classes. Clients have a clear idea of the amount of risk they want to take and expect first-class and comprehensive risk management. Mid-size and small managers are losing assets to the big, global firms. Increasing regulation makes it more difficult and costly to be small. No one can afford to be a specialist anymore.
 

How does that fit in with PIMCO as a fixed-income specialist and AllianzGI as an equity specialist?
 

PIMCO is more than just bonds and AllianzGI is more than just equities. That had more to do with our German business model. In Germany, PIMCO managed the bulk of the fixed-income assets and AllianzGI managed largely equities. But globally, the situation was different. 40 percent of AllianzGI's managed assets were and still are in fixed income. Likewise, PIMCO had already started to build up its equity and alternatives expertise before 2011 and its shift from core fixed income mandates to other fixed income strategies has been a huge success.
 

What's next?
 

We have decided to position two full-service asset managers in the market and will continue on this path. In the institutional business, the new business model with PIMCO and AllianzGI took effect in early 2012 in Germany. Later that year, AllianzGI took over the fixed-income part of the German balanced funds, and by the end of this year, AllianzGI will assume the management of the German fixed-income and money market mutual funds - a total of 33 funds - which are currently outsourced to PIMCO in a sub-advisory mandate. This is the last step in the implementation of our two-pillar strategy.

How is the transition going?
 

AllianzGI has expanded its fixed-income capacity in Frankfurt and Paris, and today, over 100 billion euros of bonds are already managed from these locations. Frankfurt and Paris will assume the management of additional funds as well. Client services and risk management for these funds were already done by AllianzGI. This will continue, as will the investment objectives of each fund. AllianzGI will assume management of the previously Allianz PIMCO-branded funds. While a number of its fixed-income and money market funds have been managed and launched in partnership with PIMCO over the last 10 years, others pre-date this. For instance, Adireth, or the Allianz PIMCO Euro Bond Fund was launched in 1966 as Deutscher Rentenfonds. Of course, mutual fund clients will still have access to PIMCO's investment solutions through the company's broad and well-established Global Investors Series fund range (GIS).
 

Before the half-year results of the Allianz Group, some were saying that your asset management division has hit a bumpy stretch of the road to success.
 

And after the release, those voices went silent. Anyone who underestimates the adaptability and earnings power of PIMCO and AllianzGI is making a mistake. Allianz can be proud of our two world-class asset managers and I have no doubt in their ability to continue to serve clients well, attract asset flows and maintain their trajectory of profitable growth.

Jay Ralph: "Our Two-Pillar Model is a success"
Jay Ralph: "Our Two-Pillar Model is a success"

As with all content published on this site, these statements are subject to our Forward Looking Statement disclaimer:

 

Stefan Lutz
Allianz Global Investors Europe
Phone +49.69.2443-14276
Send e-mail

John Wallace
Allianz Global Investors Europe
Phone +44.207.220-1273
Send e-mail

David Rowe
PIMCO Europe
Phone +44.20 3640 1643
Send e-mail