Navigating disruption – the way forward: collaboration and innovation
How can asset owners adapt to the new market conditions, and what are the main challenges they need to address in the coming years?
Pension funds, sovereign wealth funds, endowments, foundations, mutual funds and insurers are responsible for investing more than a quarter of global financial assets. For this reason, those asset owners bear heavy financial and societal responsibilities.
As an asset owner, we are the link between financial markets, clients and various stakeholders (e.g. asset managers, companies, intermediaries), with the objective of ensuring consistent financial performance over time. At Allianz France, we invest around EUR 88bn on behalf of more than five million clients. Worldwide, Allianz invests over EUR 670bn, in over 70 countries, on behalf of around 90 million clients. Our responsibility is twofold: it is of a fiduciary nature towards our clients in the Life business, while we also report directly to our other stakeholders.
Today we need to adapt to new challenges, trends and requests. Firstly, clients’ preferences are shifting. They increasingly inquire about the investment process linked to their insurance. They are also expecting us to act responsibly – not only in underwriting, but in the choice and management of assets as well. Secondly, a negative yield environment puts the realisation of long-term investment guarantees under pressure. Lastly, digitalisation is offering new investment solutions but is also bringing new competitors.
How can asset owners adapt to these new market conditions? What are the main challenges we need to address in the coming years?
Financial professionals must play a role in rethinking traditional business models
For the last twelve months the European Central Bank deposit rate as well as government bond yields in major economies have remained negative. Meanwhile, the inversion of the US Treasury yield curve is casting additional doubt on future market conditions. As volatility increases, inflation remains below targets and global growth slows, our investment outlook becomes more and more challenging. Persistently low or negative rates pose a considerable threat to investors’ long-term performance and, depending on the liability profile, have the potential to increase the strain on their stability. These conditions can limit our clients’ investment returns.
In the short term, asset owners have systems in place to fight eroding performance and reduced reinvestment yields. Some action plans involve purchasing higher-yielding investments, such as corporate bonds, emerging market assets and illiquid assets (i.e. alternatives, real estate). As a consequence, 2018 saw fundraising in private markets reach an all-time high with USD 5,000 billion1. Using Allianz’s leverage as a global organisation, we have reinforced global sourcing through shared standards and rigorous implementation methods in order to strengthen our position in illiquid assets, which play a key role in the implementation of our principles – innovation and diversification.
Yet, in the long term as responsible asset owners, we need to reinvent our business models to consistently continue generating positive returns for our clients.
Asset owners should seize this opportunity to enhance collaboration and build stronger and more innovative ecosystems
By building stronger partnerships with asset managers, academics and policy makers, we can develop products suited for our current market environment. Taking an example from the insurance industry, we can observe the development of new unit-linked products in the Life business and complementary services in Property and Casualty (P&C) business. Allianz France has utilised its partners’ expertise to launch the recent unit-linked complex fund “Allianz Néo ISR 2019” with Allianz Global Investors. Another example is the unit-linked Private Value Fund that was set up with Idinvest Partners. The latter fund is invested in private equity and private debt. On the P&C side, Allianz France is developing services beyond insurance: in collaboration with the Cartaplac network, Allianz agents can now take care of clients’ car registration and related administrative formalities.
The development of innovative offers is enabled by Allianz France’s “Ecosytems”, where new working methods are being implemented to bring together talents from different teams in dedicated squads to better understand clients’ future needs. These methods require new management skills, such as agile methodologies, and allow for more efficient product development. Artificial intelligence speeds up the time needed to process large quantities of data: by testing machine learning solutions in asset liability management, portfolio construction, asset allocation, finance and controlling, asset owners can find effective solutions to improve longterm performance.
Combined with human talent, digitalisation can improve efficiency throughout the value chain. For example, digitalisation can reduce biases in the decision-making process and can also improve governance through rules-driven processes. Meanwhile, smart automation tackles routine tasks through case-by-case optimisation of daily processes.
Sustainable investment needs to be developed to answer clients’ concern and find additional sources of performance
Nearly two thirds of French clients are interested in sustainable investment solutions2. At a global level, sustainability is one of the principal topics of concern for millennials3. Meanwhile, sustainable investment offers new opportunities for diversification. According to the United Nations, to meet the 17 Sustainable Development Goals, worldwide financing requirements amount to USD 6 trillion4. The EU has committed to meet dedicated climate and energy ambitions by 2030, which would require EUR 270 billion of investment5. Sustainable investment allows asset owners to do good as well as to do well. Doing good: Allianz France has invested EUR 3.5bn in Green assets6. Doing well: the increasing focus on sustainability has already started to change the traditional risk-return relationship. Today, investors are developing more sophisticated assessment methods to integrate considerations related to environment, social and governance (ESG) impacts. Investing in sustainable companies and projects could become a source of outperformance in the longer term. In fact, the cumulative return of MSCI KLD 400 Social index since 1990 has outperformed the S&P 5007. As longterm investors, asset owners will benefit from the mitigation of climate related risks.
Sustainable investment allows asset owners to do good as well as to do well
The ambition is to reach a critical mass of sustainable investors and raise awareness. Since Allianz strongly believes in this idea, we supported the launch and became a member of the Net-Zero Asset Owner Alliance, backed by the UN, together with eleven asset owners. All members are committed to reaching portfolio carbon neutrality by 2050. But the Asset Owner Alliance is also needed as a common voice to share knowledge and build a clear long-term vision and methodology. In this context, internal and external collaboration is fundamental. Investment Management teams need to continue to develop networks inside their company as well as outside of their immediate circles. Regulation can give momentum to sustainable investment by setting clear frameworks. Showing our regulators that we can collaborate is essential to help bring about alignment and find common solutions. To tackle climate change we need to continue building stronger networks and pursuing dialogue with all stakeholders. In conclusion, the challenging macroeconomic environment should be seen as an opportunity for asset owners to reinvent their business models and take leadership on global issues. By drawing on product and process innovation to better answer clients’ needs, asset owners will maintain consumer confidence at its highest level, foster innovative ideas and attract talent.
(1) McKinsey Global Private Markets Review 2019, www.mckinsey. com/~/media/McKinsey/Industries/Private%20Equity%20and%20 Principal%20Investors/Our%20Insights/Private%20markets%20come%20 of%20age/Private-markets-come-of-age-McKinsey-Global-Private-Markets- Review-2019-vF.ashx, last access: 11/10/19. 08 (2) Vigeo Eiris, vigeo-eiris.com/fr/linteret-des-francais-pour-la-financeresponsable- se-confirme-resultats-de-la-10eme-enquete-ifop-pour-vigeoeiris- et-le-fir/, last access: 11/10/19. (3) Deloitte, www2.deloitte.com global/en/pages/about-deloitte/articles/millennialsurvey.html, last access: 11/10/19. (4) United Nations Environment Programme Finance Initiative, www.unepfi.org/wordpress/wp-content/uploads/2018/11/ Rethinking-Impact-to-Finance-the-SDGs.pdf, last access: 11/10/2019. (5) European Commission, ec.europa.eu/info/sites/info/files/180308- action-plan-sustainable-growth-factsheet_en.pdf, last access: 11/10/2019. (6) Allianz France – AIM Paris, www.allianz.fr/v_1562148255480/quiest- allianz/allianz-s-engage/media/Allianz_France_-_AIM_Sustainable_ Investment_Report_2018.pdf, last access: 11/10/19. (7) Allianz Global Investors, “ESG: Awareness Leads to Assets”, last access: 11/10/19.
Matthias Seewald is Chief Investment Officer and member of the Executive Committee of Allianz France, and also member of the Investment Management Board of AIM SE since April 2013. He is also responsible for the investment activities of the Paris Hub, which includes AZ Partners and Allianz Benelux. He manages the investment strategy, including all aspects of ESG-compliant investing, for both the Life/Health as well as the Property/Casualty segments of Allianz France. Matthias also oversees the Asset-Liabilities-Management and the Cash Management functions; thus AIM builds the bridge between the insurance and the investment world. As of Q2 2019, Allianz France‘s portfolio including unit linked assets represents about €110 billion. Matthias Seewald has more than 25 years of experience in the areas of finance and investment management, including accounting, financial reporting and controlling, and worked in several different locations