My co-author today is Karl Happe, chief investment officer of Allianz Global Investors’ Insurance Related Strategies. Although the strategies developed and deployed by Allianz are aimed at the insurance market, there are many important lessons that most investors would benefit from, in particular family offices.
Allianz Global Investors is a globally active asset manager and subsidiary of the Allianz insurance company. Allianz GI manages in total about €450 billion of equity, fixed income, multi-asset and alternative assets. The Insurance Related Strategies team manages about €140bn (Dh1.78 trillion) of fixed income and equity assets in five European locations with a team of 30 portfolio managers. The insurance-related strategy team’s clients include both insurance subsidiaries of the Allianz group, as well as third-party insurers, pension funds and captive insurance subsidiaries of industrial companies.
The main point in understanding insurance-related investment strategies, for our purposes, is that they are part of a core business. Conventional asset managers simply focus on managing an investment portfolio with their main goals and constraints tied to the return and risk of the investment portfolio.
In insurance-related investment strategies the investment strategy is developed in close coordination with the business to complement and enhance the core business. This requires managing issues that conventional asset managers do not normally deal with. The primary issue for the insurance business is, of course, regulatory issues that the core business not only needs to comply with but also needs to constantly update its understanding of such regulations and ensure that they are in compliance, not only in their core business but also in their investment portfolios. Conventional managers can rarely do this, especially over multiple regulatory environments.
The second issue relating to developing an investment strategy that is part of a business is that the goals and constraints for the portfolio are different. A conventional asset manager will usually have as a primary aim maximising risk-adjusted returns. An insurance-related investment strategy will link its strategy to the core business. For example, many reinsurance businesses are highly volatile businesses which might lead insurance-related strategies to seek higher volatility portfolios in uncorrelated markets relative to a conventional manager.
From the family business point of view, the goals and constraints of their investment portfolios should not be developed based solely on asset management best practices. A deep understanding of the core business is integral to developing a successful family office investment. Too often local family offices use conventional asset management thinking to conclude that they should invest their assets in markets external to their core business so as to achieve diversification. In other words, let’s invest in areas that we don’t know and don’t understand in the hopes that we can complement our successful core business.
Allianz’s philosophy teaches us to look at how to complement rather than decouple the investment portfolio from the core portfolio. One idea might be to diversify sectors by investing in the same geographies as the core business, sharing expertise and simply investing in a global index for diversification.
Another area that Allianz’s insurance-related strategies works closely with its clients is asset liability management. This is just as important for other businesses. Does the investment team know, let alone actively manage, the upcoming cash needs of the core business? The usual family solution of a CFO who has no treasury management experience interfacing with a conventional asset management team, whether internal or external, often ends in failure and the unnecessary use of expensive bank lines to cover liquidity gaps. This function is so important that Allianz offers its asset liability management services to large enough customers. It does an analysis of the maturity structure of a company’s financial commitments and the uncertainty of when and how much these could be, and then it optimises the investment allocations to various assets to ensure that for normal liquidity events, cash is always sufficiently available to cover them.
For less common, but nonetheless possible special liquidity requirements, Allianz ensures that the investment portfolios have sufficient easily saleable investments to cover unlikely but foreseeable cash shortfalls.
The Allianz Global Investors’ Insurance Related Strategies team managing these multiple facets to the service they provide not only to their parent company but also to companies across the world is a balanced scorecard. As opposed to conventional managers who will simply state “we aim for a Sharpe of 2.3” or even a simplistic “our goal is a 30 per cent IRR” the Allianz team will sit down with their clients and ask them what their objectives are and the priority of these objectives. Over an iterative process the team will agree a scorecard with their client and review it on a regular basis to check if performance is matching objectives and if the objectives have changed.
Whether you have the US$100 million to contract Allianz’s services or whether you wish to simply improve your personal family office, ask yourself this: do you want a restaurant that when you sit down they tell you your meal will be a steak, medium, with mashed potatoes? Or do you want a restaurant that gives you a menu and asks you what would you like?
Sabah Al Binali is an active investor and entrepreneurial leader with a track record of financing, building and growing companies in the Mena region. You can read more of his thoughts at al-binali.com. Karl Happe is the chief investment officer of Allianz Global Investors' Insurance Related Strategies.
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