Institutional investors in Europe rank interest rate risk first when asked about their biggest risk in the next 12 months. Overall, nearly 70 percent perceive interest rates as a huge or considerable risk to their ability to achieve their investment targets. The risk currently posed by sovereign debt adds a new dimension to this, with 61 percent of respondents seeing this a considerable or huge risk.
Risk has many guises ...
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These are amongst the main findings of Allianz Global Investors' (AllianzGI) inaugural RiskMonitor survey. In former times, these results would indicate a shift into equities, however, concerns about overall market volatility and fear of a sharp drop in equity markets are also seen as major risks. "The variety and the impact of financial as well as regulatory risk have multiplied since the financial crisis", comments Elizabeth Corley, Chief Executive Officer of AllianzGI Europe Holding GmbH. This is also reflected in the fact that nearly half of respondents consider tail risk as a major issue. Corley continues: "There is not only a multitude of types of risk facing institutional investors but investors also now perceive risk as a systemic issue because of the potential for increasing interrelation. In this context, it is interesting to note that there is so much confidence in the stability of the Euro." The survey shows that 76 percent of institutional investors in Europe believe that the Euro will survive under the current circumstances, whilst only 6 percent disagree.
Elizabeth Corley: "The variety and the impact of financial as well as regulatory risk have multiplied since the financial crisis"
Investment dilemma
"The former safe havens have disappeared", according to an Austrian pension fund questioned as part of the RiskMonitor survey. Yet, institutional investors still have to meet their investment targets. "Even though from a valuation perspective, European equities would be an intuitively easy choice, every investor's risk perception, risk tolerance and risk exposure is subject to many different factors and therefore looks unique", says Neil Dwane, Chief Investment Officer Europe of RCM, a subsidiary of AllianzGI.
The capital markets have changed dramatically since the outset of the financial crisis and so has the perception of risk calling for a new framework for risk management. "We have to shift from a backward-looking static framework based on a normal distribution to a forward-looking dynamic risk management framework that explicitly accounts for empirical facts such as fat tails and correlation breakdowns. Active and dynamic risk management strategies that go beyond pure diversification will become ever more important", says Reinhold Hafner, Chief Executive Officer of risklab, a subsidiary of AllianzGI.
Regulatory risks rank lower
When asked about their fears with regard to regulatory and governance issues, institutional investors demonstrate confidence. Stricter regulation or rising reporting requirements rank highest amongst these risks, but are only seen as a major risk by 29 percent and 20 percent respectively. "The RiskMonitor survey shows that institutional investors in Europe trust the framework they are operating in and are generally confident of their ability to cope with the challenges in this space", says Elizabeth Corley, noting that many regulations have a considerable impact on investment decisions and regulators are becoming more inclined to address systemic risks which could impact capital markets.
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