For years, Allianz (ALVG.DE), one of the world’s largest investors, put billions into property, wind farms, and even London’s sewage system, but now it is moving to eschew such “alternative” investments for plain vanilla bonds, people familiar with the matter said.
The German firm’s new approach comes amid a radical change in the investment environment, with central banks hiking interest rates to curb runaway inflation, leading to higher yields on mainstream assets, the people said on condition of anonymity.
They emphasized that the reallocation would be gradual and not lead to fire sales, with new money going mostly into fixed income instead of alternative investments.
The move by Germany’s largest financial company by market value and assets provides proof of a major shift towards the multi-trillion dollar market for investment-grade bonds, which keep governments afloat and pensioners fed, and away from alternatives that jump-started returns in an era of ultra-low and even negative interest rates.
For Allianz, the shift also coincides with efforts to rebuild its reputation after paying some $6 billion in fines and settlements reported in 2022 for fraud in the United States. This resulted in part of its U.S. asset management business accepting a guilty plea for the conduct, something its own lawyers said was similar to a “death penalty”.
One of the people mentioned that Allianz’s solvency ratio – a measure of financial strength – had decreased in the wake of the fund’s debacle and that the new investment approach could aid to restore it. Giulio Terzariol, Allianz’s chief financial officer, explained the company’s rethink in November when he told analysts on a conference call:
“The value proposition of fixed income is much more compelling compared to a few years ago … it’s a different game”.
Allianz’s results, expected on Friday, will provide an annual update on the company’s investment mix.
A global insurer, Allianz ranks as one of the world’s largest money managers with 2.6 trillion euros ($2.79 trillion) in assets under management via bond giant Pimco and Allianz Global Investors, whose U.S. unit managed the funds at the heart of its latest scandal.
Allianz’s jump into alternatives started when Michael Diekmann, now group chairman, was CEO. In a speech on his final day in that job in 2015, he complained about potholes on roads between Salzburg and Munich, underlining the need for infrastructure investments. He vowed Allianz would develop so-called “real asset classes”, that included infrastructure, from 80 billion to 110 billion euros.
Since then, Allianz has expanded its alternative investments by 350% to over 200 billion euros, while fixed-income investments increased by 40% and equities by 30%, according to Reuters calculations using Allianz financial statements.
Among the large buys were the stake in London’s new sewage tunnel, and wind farms from Finland to the United States.
Real estate, which forms the bulk of Allianz’s alternative investments, included about 700 million euros in stakes in New York’s Hudson Yards complex, and a tower in Frankfurt that is part of a property development valued at 1.4 billion euros.
But with the shift in the investment climate, Allianz is seeking opportunities to move new money into other investments like fixed income, the people said.
Annette Kroeger, CEO Europe for Allianz Real Estate, said her division has a “wait and see” approach for property. “We look ahead, like the rest of the market, with caution,” she told Reuters.
In a sign of the changing times, even yields on bonds in Japan have been climbing higher on speculation that the era of ultra-loose monetary policy is coming to a halt.
Allianz is not the only one rethinking alternatives. Goldman Sachs’ asset management arm is making plans to substantially cut its $59 billion of alternative investments. Credit rating agencies S&P and Moody’s, which both give Allianz high marks, have indicated the greater risk presented by comparatively illiquid alternative investments in Allianz’s portfolio.
Alternative investments come at a cost, requiring Allianz and other insurers to lay aside more capital to own them since they are less liquid compared to bonds. Allianz expects, some of the people said, the shift will help to increase its capitalization and solvency ratios that track how the company would cope during a crisis.
Allianz’s so-called Solvency II capitalization ratio – a key gauge of financial health – decreased from 229% in 2018 to 199% at the end of the third quarter of 2022, according to Allianz’s financial statements, in part due to the fines and settlements for the U.S. fund fraud.
The case was revealed after $11 billion in funds crumbled as markets roiled with the flare-up of the coronavirus in early 2020. The U.S. prosecutors claimed that the fraud included fake documents, altered spreadsheets, and fabricated risk reports.
Among the $6 billion in fines and settlements, Allianz paid $1.49 billion to one of its major investors, Blue Cross Blue Shield, in an effort to “generously” compensate, according to a presentation Allianz lawyers made to the U.S. Department of Justice in 2022, which was made public in a court filing in January.
Buy Crypto NowA lawyer for Blue Cross Blue Shield would not comment.
In the same presentation, Allianz’s lawyers contended that the guilty plea that Allianz eventually accepted for the U.S. business was “a death penalty for a registered investment adviser”.
In its wake, Allianz has had to shut down Allianz Global Investors in the United States in a severe blow to the company.
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