As Germany’s biggest insurance group, Allianz has been managing the investment of its assets for over a century. But it was not until 1997, that this Cinderella business was transformed into the third core activity of the group.
This was done with the intent of forming a world class operation able to challenge the global players on their own terms. From a size perspective, having over E650bn in assets under management ranks Allianz among the top 10 worldwide. But the group’s team in Munich would be the first to acknowledge that asset size alone does not necessarily win a place at the long heralded feast for the global investment houses.
The group has demonstrated its determination to weld together an investment colossus by its acquisition last year of US manager PIMCO, one of the world's leading fixed income specialists, with something over E300bn in assets at the time of acquisition.
This changed the complexion and complexity of Allianz’s investment operations, by creating three identifiable strands to the business: the traditional insurance asset management accounting for over E300bn, its genuine third party non-group business amounting to E30bn in assets and the E300bn-plus PIMCO operations, all of which is in third party mandates from 1,600 institutional clients, the bulk of which are in the US.
An Irish proverb says that the longest journey begins with the first step. Allianz’s first move, once the declaration of independence had been made, regarding its asset business, was a very basic one, according to Bastian Schmedding, joint head of European institutional business development. “We put everything into a separate building in Munich, then worked on the legal separation.” Since then much of the work has involved putting in place a structure that will enable the group to deliver its investment process to the different target markets, which comprise both institutional and retail clients, leveraging on its world-wide insurance franchise.
So, in addition to the main asset management company and a new subsidiary being set up, Allianz PIMCO Asset Management (APAM), there is the group’s long established KAG for the German funds business, a recent Luxembourg subsidiary with a range of funds, the Allianz Vermögens Bank for private customers and, in course of formation, a specialist insurance asset management company, as well as the Asia Pacific asset management operation in Singapore.
The activities of the different companies are carefully crafted to reach the desired audience, often through intermediary networks, both independent and part of the group. In Schmedding’s view: “We are lucky to have been able to build such a structure virtually on a green field basis.”
So APAM, in which PIMCO Germany is legally and operationally located, now sets the strategy for all of the fixed income assets of the AAM group, “We put PIMCO in charge of the fixed income asset management,” says Schmedding, adding that the aim of buying the US group was to add value and not to destroy it by imposing some misguided cultural uniformity. “We want the benefits that both approaches can bring.” And to that end, most of the Allianz fixed income team and key people from PIMCO were integrated into APAM.
The ‘master portfolios’ are the result of the investment process the group is delivering to both the institutional and retail market segments. The extensive research capabilities of Allianz operations worldwide to provide research at the micro level, supplemented by macro research from the Munich and Paris-based teams, are used to produce the “master portfolio”, from which regional equity and fixed income portfolios are derived and which can be built into regional, balanced or global sector portfolios. Also, a ‘best research’ equity product has successfully been launched, which is based on the best ideas of the in-house analysts. In addition, PIMCO has developed a number of specialised equity products. “One of our challenges is to see how we can leverage these systems outside the US,” says Schmedding. Though the aim is outperformance through active management, some passive products are available from the quantitative investment unit.
“In addition, there is stringent risk management at all levels,” he points out. Originally, the group wanted to run the investment portfolios for its insurance operations within the same company as its third-party asset management, since all would be using the master portfolio process. “But listening to the market, we decided to change direction, even though we were happy with the ‘Chinese Walls’ in place.” The decision was taken to split the insurance assets into a separate company, as it was felt there was a perception that insurance requirements might dominate. “We wanted to avoid people taking the view their assets were not separate from the insurance assets.”
The main difference between the insurance assets and other discretionary mandates is not as to how they are managed, which is through the same master portfolio process, but in the accountancy procedures to fit in with the book value system still prevalent in Germany and some other markets. “For example, there is the issue as to how gains are going to be realised as these have to fit in with portfolios’ book-keeping requirements.”
The long established Allianz KAG runs 77 “Spezialfonds” and 17 public mutual fundsfor both internal and third party clients. There are an additional eight funds offered to German retail clients through a Luxembourg-based KAG. External clients are fairly evenly split between Pensionskassen, non-group insurance companies and corporates. “We can offer ‘Spezialfonds’ to clients from E25m in assets, or even below that, if the circumstances warrant it.” One product that has been successful is funds based on the VAG insurance regulation allocation mix. Based on the master portfolio process, products can be tailored so that they ideally match the liability side of the insurance clients, Schmedding adds. In particular, these have proved popular with the funds run by self-employed profes-sional bodies for their members.
But Allianz’s drive into asset management is directed as much at delivery to the retail as to the institutional investor. It has E5bn invested in its range of 17 domestic KAG mutual funds and just two months ago launched its Luxembourg range of ‘Horizon funds’. “The Luxembourg move provided us with extra flexibility, enabling us to offer a product structure that would not be possible in Germany.”
Through the umbrella fund structure, some 43 funds are on offer managed by the international team, including specialist funds from other Allianz affiliates, such as RAS and AGF. “This enables us to offer fund of funds products. We have done very well there,” comments Schmedding. The plan is to roll these out across Europe.
When dealing with individual investors, the group has tried to be proactive in relation to clients’ risk levels and not just rely on their own assessment of risk tolerance. By developing the ‘Anlage Analyse’, equivalent to an investor ‘fact find’ in other markets, Schmedding says the group capitalised on this legal requirement and turned it into a very good tool that “adds value to the information-gathering process”. “Risk analysis is included as part of this sophisticated approach, which is designed to make sure the investment meets the client’s objectives and that inappropriate products are not sold.”
The private banking operation in Allianz Vermögens Bank offers clients the full investment range from mutual funds through to their own portfolios of stocks, while the sales through tied agents and others within Germany are handled through this structure.
Allianz is determined to break with standard domestic practices and offer investment services on a clean and transparent fees basis, thanks to not having a brokerage arm within the group, but at the same time ensuring internationally competitive levels of fees are obtained on their products. “We find our high flat fees are not an obstacle to marketing,” he says. The hard line on fees underpins that the approach is profitability, not just assets under management.
Research carried out by the group has disclosed a high level of market awareness for the Allianz brand and readiness for its ap-proach, particularly for products like the ‘global equity’, where a number of mandates have been won already. Allianz thinks it is the first global player to become fully GIPS compliant and is con-vinced this will rapidly become a key aspect when clients compare performance between groups.
Working with other fund groups and offering their products is something Schmedding does not rule out within the foreseeeable future. “Retail investors no longer like being offered just one single providers’ products, they want to feel they have choice.” The use of internet selling is likely to increase this trend.
But on the institutional side, Allianz is gearing up to win the prize of long-term pensions assets, capitalising on the ability to bring in expert liability strengths. “We have a very sophisticated financial engineering team which acts as an interface between the insurance and asset management sides.” As Germany has to move from book reserve to funding, these skills will be in high demand, he predicts. The market is coming the way of the good quality managers with first class risk controls in place. “Our challenge is to capitalise on the fact that there is a value in our large insurance assets, even though these are not directly in the asset management pool, to help grow our third-party assets. The addition of the PIMCO team, which has has been highly successful in the US, means we can now move globally.”
A question for speculation is how differerent the picture would have been had Allianz captured the prize of Deutsche Bank’s DWS investment business, as part of the Deutsche Dresdner deal that foundered earlier this year. Obviously, there was great disappointment in Munich that DWS did not fall into Allianz’s lap. But the group is is clearly now in strong position to grasp any other opportunities that may come up in future. IPE