EUROPE - Georg Schuh, chief investment manager at DB Advisors, has sought to lift some of the worries that German pension have about bond yields and predicted the US Federal Reserve will increase interest rates by next year.
His company, Deutsche Bank, is also adjusting the asset allocation within its own pension fund next year in the wake of a change to accounting measures.
In an interview with IPE, Schuh warned: "A long-term low interest rate scenario is the biggest market misjudgement. Lowering the interest rate was the US federal bank's reaction to an emergency situation, which no longer exists."
Schuh predicted the US Federal Reserve will raise interest rates in the second quarter next year, following rate hikes in the first quarter within emerging markets countries.
"Should - contrary to our expectation - monetary policy remain in ‘emergency mode' until the end of next year, the door would be wide open for the emergence of a bubble on the asset markets," he also claimed.
He forecast a bond bear market in 2010 and revealed officials behind Deutsche Bank's own pension assets have shifted their focus to corporate bonds over the last few months, as government bonds "are less attractive".
This shift is in part because there has also been a change in the accounting method to replace the so-called corridor method with the Statement of Recognised Income and Expenses (SORIE), which has in turn sparked a change in the fund's risk profile.
Under the new accounting method, which is designed to pre-empt possible future changes in the German accounting standards, the risk budget directly influences the banking group's assets, which means less risk is taken within the pension investments.
"We discussed how long the corridor method might still be appropriate and decided to change [away from it] before being forced to do so," added Nikolaus Schmidt-Narischkin, head of fiduciary management at DB Advisors.
In the course of the changeover, the actuaries' method of calculating the discount rate was also reviewed. Findings showed the portfolio used for calculations was too far removed from its actual investments.
So under the new risk budget, a maxium of 5% of the portfolio is currently invested in equities but exposure to companies comes from the bond portfolio which is made up of almost 60% corporates. Further risk is also being taken in the high-yield sector as its allocation has been doubled from 2.5 to 5%.
"The investment strategy for the DB Pensionsfonds has always been not only market-driven but also liability-driven," explained Schmidt-Narischkin. "However, over the last two years the focus on liabilities has increased even more as accounting has had a greater influence."