Allianz Global Investors Risk Monitor #4

(H2 / 2012)

Under Pressure

Understand. Act.

RiskMonitor# 4

2

Investors’ purchases of sovereign debt more and more appear like a donation to the region’s immediate stability than!a source of long-term returns for pension!scheme members.

3

Content 3 About the survey 4 Introduction 5 Management summary

6 Financial risks 6 Unyielding governments 7 Decades of pain11 A Sting in the tail

13 Financial repression13 This time it’s difficult15 Look East!

18 Regulatory and governance risks

22 Results at a glance

About the survey

In RiskMonitor, Allianz Global Investors (AllianzGI) together with Investment & Pensions Europe (IPE) magazine surveys European institutional investors’ perceptions of capital market, regulatory and governance risk. By repeating the survey on a regular basis, it is possible to gauge institutional investors’ risk perceptions over time. This fourth survey was conducted from 8 to 26 October 2012 both online and per fax. Altogether, the survey gathered responses from 155 institutional investors with a total of EUR 1,934.5 billion (bn) of assets under management or assets under advice. The survey targeted institutional investors in Austria, France, Germany, Italy, the Netherlands, Switzerland, the United Kingdom, as well as in the Nordic Region (Denmark, Sweden, Finland and Norway). Due to the size of its sample the survey does not claim to be representative, but it does carry enough weight to outline the most important trends among institutional investors in Europe. Allianz Global Investors had agreed to donate EUR 25 for every completed questionnaire to Allianz Direct Help, an Allianz SE charitable trust designed to identify and select humanitarian and other aid projects. IPE has agreed to donate EUR 15 per completed survey to the IPE Scholarship Programme, a fund whose aim is to give grants to individuals pursuing advanced study in the area of pensions.

4

Introduction

In my introduction to the previous RiskMonitor, I discussed the erosion of trust in sovereign debt with regards to hedging costs as measured by a significant increase in CDS spreads. In some instances, these costs have been markedly higher than for some global blue chip companies. Now it seems like headline-grabbing risks are on the decline and significant progress has been made in order to contain the eurozone debt crisis. The reason for this lies in the European Central Bank’s willingness to fight the sovereign debt crisis in Europe or – as Mario Draghi put it – to do “whatever is necessary” to save the euro. Actions and money speak louder than words and doubts, so after liquidity injections of more than EUR 1,500!bn into the eurozone alone since 20081, it has become clear that no financial authority is willing to test the abyss just for the purpose of sticking to principles. Unconventional policy answers are becoming more and more conventional and it is becoming clearer that Western economies are prepared to inflate their way out of debt thus trying to avoid any systemic shock. However, the sovereign debt crisis is far from being over.

What are the consequences? Yields of investment grade sovereigns are at historic lows – often below the respective GDP growth rates and inflation, leaving investors with negative real returns. It is no wonder that current interest rate levels have become a serious concern among RiskMonitor respondents. This phenomenon, known as financial repression, has reappeared after it was used in the US to reduce public debt from 120 % of GDP in the 1950s to about 35 % in the 1980s.

After this (long) episode, the decade-long “great moderation” had a sedative effect on long-term investors. Until the end of the last century, it was rather difficult not to meet investment targets by simply putting a large chunk of assets into investment grade sovereigns. Certainly, some were hungry for higher returns, but the era and the bond markets’ total returns were benign for liability-driven investors. Those were the days …

It is different today since we are unfortunately not merely talking about a long-term trend in yield compression and three financial crises emanated in the new century. Many investors feel that the market can no longer be trusted. One of the reasons behind this lack of confidence is that the markets’ ups and downs have not been driven by normal supply and demand dynamics, but by what policymakers do or are believed to do next. Since the financial crisis, the U.S.!Federal Reserve and the European Central Bank have deployed masses of money into the markets in pursuit of their goals, creating major market distortions and a risk-on / risk-off environment, turning much of investors’ common knowledge upside-down and pushing governments, central banks and regulators in the driver’s seat of financial markets.

Regulation of capital markets and investors will become more important not only to improve the stability of the global financial system, but also to help governments to cope with their debt. In this context, it doesn’t come as a surprise that projected regulation on capital requirements favours investments in sovereign bonds. Though not capital controls in a strict sense, but because they massively affect asset allocations of institutional investors and pension funds in a pro-cyclical way, this is a further facet of financial repression.

I am optimistic to see that investors are quite constructive when it comes to watching out for substitutes to sovereign debt and readying their organizations for a broader variety of risks. On the other hand, investors who only focus on avoiding risks instead of deliberately taking specific risks will find financial repression a trip of no return.

Sincerely,

James D. Dilworth Chief Executive Allianz Global Investors Europe

1 Source: ECB balance sheet time series, data as of November 2012

5

Management summary

The good news from this latest issue of RiskMonitor is that far fewer European institutional investors are worried about the creditworthiness of their sovereign bond issuers. Twelve months ago, 35 % deemed sovereign debt risk a huge risk to their financial targets for 2012; last month that percentage had dropped to just over 13. Likewise, fewer than 9 % of the 155 respondents see overall market volatility as a huge risk. A year ago the percentage was three times bigger. But investors are far from relaxed on all fronts: since the three latest surveys the share of respondents deeming tail risks as a huge risk has remained stable at around 15 %.

The bad news is that investors are becoming more preoccupied with the miserable and, in some cases, negative yields on sovereign debt. More than 20 % of the respondents view current interest rate levels as a huge risk. This is substantially more than every other category that has been analysed. This perception is even more pronounced in France, Italy and the German-speaking countries. One in three respondents named current or falling interest rates as the biggest single risk to their financial targets for 2013 (and even rising interest rates are now a greater worry than sovereign debt risk).

Although RiskMonitor concentrates on potential threats over a one-year period, it appears that investors are increasingly concerned that low yields are here to stay for a long time. When asked which macro topic kept them up at night, one-quarter of respondents answered “financial repression”.“It is the only way out since massive liquidity has not had any effect,” said the adviser to one Dutch public-sector pension fund.

Central bank intervention has effectively disabled the mechanisms of the market. Large rescue packages by the U.S. Federal Reserve and the European Central Bank have more or less created a binary market. This market is characterised by strong fluctuations in risk appetite and risk aversion known as “risk-on / risk-off” (RORO).

The portfolio manager of a German corporate pension trust added: “Financial repression emphasizes the already prevalent ‘herd mentality’ among investors, i.e. everybody is forced to invest in the same assets or asset classes, and is therefore really dangerous.”

Respondents do, however, seem cognisant of the danger and keen to break away from the herd to explore alternatives to their own sovereign debt. When asked for government bond substitutes that generate reliable and sufficient yields, answers ranged from covered bonds (22.7 %) to infrastructure debt and infrastructure equity (13.6 % and 13 % respectively), private equity (10.4 %) and commodities (5.8 %).

By far the most popular response was corporate debt. More than two-thirds of respondents named this class (although a few respondents warned of a credit bubble in the next six to twelve months). Emerging markets debt (37 %) and real estate (31.2 %) were the next second and third most popular answers. By country of response, some interesting variations appeared: real estate appealed to more than half the respondents from France and almost half the respondents from Switzerland; private equity attracted almost 18 % of the Nordic votes.

Perhaps the strongest relative surprise was the greater popularity of emerging markets equities (10.4 %) over developed markets equities (9.7 %). Do the former really promise more reliable yields on an absolute basis, or is it the case that relatively investors still feel overexposed to the latter?

It can be fairly surmised that Europe’s institutional investors have profound confidence in emerging markets from their answer to another new question in this edition of RiskMonitor on barriers to investing in Asia; fewer than 4 % believe the Far East suffers from weak fundamentals relative to other regions. At the same time, 28 % pinpointed transparency and difficulty in gathering information as their biggest obstacle to investing in this region and more than 20 % worry about liquidity. In spite of these concerns, 58 % expect to increase their exposure to Asia. Perhaps this is the tell-tale sign of the desire to escape financial repression.

6

Financial risks

Financial risksUnyielding governments

The title of the previous RiskMonitor was “Rethinking Safety”. In the first half of 2012 investors suggested a variety of assets they defined as safe, from sovereign debt, quality equities and hard currencies to event-driven hedge funds, swaps, renewables and covered bonds.2 As financial repression takes hold of mature economies, institutional investors in Europe are not only having to think even further on their definitions of safety, and in particular safe havens, but also seek new means of return.

Much comfort has been taken from the actions of politicians and central bankers in the second half of 2012. The declaration by new ECB President, Mario Draghi in early September that the Bank would stand behind governments in the eurozone – effectively as a lender of last resort – has become the most frequently repeated statement within financial circles. Its power is reflected in the diminution of sovereign debt risk as a major headache for participants in the current RiskMonitor survey.

In spring 2012, 21.2 % saw sovereign debt risk as a huge threat to reaching their twelve-month financial targets. The previous autumn the figure had been 35 %. By the end of this autumn, just 13.2 % felt the same way. In Germany the fall was starker: from more than four in ten respondents to less than one in ten in a year.

In order to achieve our financial investment targets for the next 12 months, I see sovereign debt risk …

As a huge risk As a considerable riskAs a minor risk Not as a risk

0 %

10 %

20 %

30 %

40 %

50 %

60 %

70 %

80 %

90 %

100 %

H1/2012H2/2011H1/2011 H2/2012

14.7 %

46.8 %

36.5 %

1.9 %

21.2 %

52.6 %

24.1 %

2.2 %

35.0 %

43.6 %

17.9 %

3.6 %

13.2 %

55.3 %

27.6 %

3.9%

So far, so good. Investors’ confidence in the creditworthiness of their own states is on the rise. The news gets better. The sense of danger posed by overall market volatility and a sharp drop in the value of equities also seems to have quelled since the summer. From a low point in the second week of June, the STOXX Europe 600 Index has rebounded to the high range it reached in March. Peripheral stock markets such as Spain’s IBEX 35 and Italy’s FTSE MIB still show susceptibility to bad news – recall the mid-summer falls and recent sell-offs – but even they have shown more stability in recent months than previous quarters.Yet current interest rates remain a stubbornly big problem for investors trying to meet their financial targets. Amalgamating those responses which categorise current interest rates as a huge risk and those for whom they are a considerable risk, we find this has become almost as common a worry as sovereign debt risk itself (67.1 % of responses versus 68 %3).

In order to achieve our financial investment targets for the next 12 months, I see current interest rates …

0 %

10 %

20 %

30 %

40 %

50 %

60 %

70 %

80 %

90 %

100 %

H1/2012H2/2011H1/2011 H2/2012


6.5 %

41.3 %

45.2 %

7.1 %

19.9 %

44.9 %

30.9 %

4.4 %

19.9 %

43.4 %

29.4 %

7.4 %

20.6 %

46.5 %

28.4 %

4.5 %

This shift in anxiety within the world of fixed income from creditworthiness to yield is made more starkly when investors were asked their biggest single financial risk in the next twelve months. Less than 6 % answered sovereign debt risk while over 16 % said current interest rates. This is close to a transposition of sentiments of six months ago. Note that falling interest rates also captures more than 16 % of the vote in this poll. If the two groups concerned most by rates are put together, they account for almost one-third of all respondents, far ahead of those worried by overall market volatility or even equity volatility.

2 AllianzGI RiskMonitor “Rethinking Safety”, June 2012. NB More than 5 % of respondents said there were no safe havens.3 We aggregate responses of ‘huge risk’ and ‘considerable risk’ as ‘major risk’.

7

Financial risks

Top 5 financial risks What is your biggest financial risk in the next 12!months?

Overall market volatility 20.7 % (–3.2 %)*

Sharp drop in equity markets 18.1 % (+1.4 %)

Falling interest rates 16.1 % (+1.6 %)

Current interest rate levels 16.1 % (+8.1 %)

Rising interest rates 7.1 % (+0.6 %)

*compared to survey H1 / 2012

Decades of pain

What is propelling this rising anxiety about current interest rates? The obvious cause is that returns on the sovereign debt of most G10 countries lie somewhere between miserable and negative. This alone is enough to hurt those types of investors constrained by regulation directly or indirectly to hold such assets. One UK investment adviser bemoaned the double-whammy on both sides of the balance sheet.

“The continued low interest rate environment is affecting the liability side of the equation which affected the funding level which puts the pension fund under pressure and makes the cost of SWAPS expensive.”

We will explore these consequences in due course.

The more profound cause of worry, however, is that this low interest-rate environment could be here to stay for a very long time. If the commitment of Mario Draghi to stand behind eurozone governments is a happy mantra for institutional investors, the wisdom of economists is a sobering counterbalance. In their work, the economists Carmen Reinhart and Belen Sbrancia show how historically governments faced with huge debts have often passed on the pain to their lenders through “financial repression”.

In essence, financial repression leaves bondholders and savers to pay the bills by dint of miserable nominal yields. The offload is completed by inflation devaluing those miserable yields further in terms of ultimate purchasing power of the lenders.

”Financial repression is a silent way to reduce government debt. It works much more smoothly than a haircut. And let’s not forget that financial repression is politically easier to implement than expenditure cuts or tax hikes,” says Stefan Hofrichter, chief economist of Allianz Global Investors, in explaining the appeal of financial repression to democratically-elected governments.

And this is the sobering thought: the size of the debt for the US alone exceeds US$ 16trn. In Europe, for just France, Germany and the UK the figure exceeds US$ 6trn. Given the magnitude of these imbalances, it is no wonder that Reinhart, Reinhart and Rogoff suggest that such debt overhangs last on average 23 years. That is the really bad news behind responses on interest rates in this current RiskMonitor. Investors are waking up to the reality that their fixed income portfolios could be a drag for decades to come; that the Great Moderation which gave such a favourable tailwind to bond yields seems to be well and truly over.

“For the eurozone as a whole, debt-to-GDP ratio is around 90 %, substantially above the targeted 60 %. Assuming an annual liquidation effect of 3 % by keeping interest rates below the ‘fair value’ level, it would take roughly 10 years to bring the region back to the debt levels that were originally set at Maastricht as upper limits,” says Hofrichter.

For indebted governments, financial repression works best when accompanied by sufficient inflation to erode the real value of the debt. Nothing explains financial repression better than to consider the real yield on popular instruments such as the UK 10-year linker. Mid-November, it was –0.65 %. So bondholders were paying Her Majesty’s Treasury for the privilege of lending it money. Of course, inflation-linked liabilities are more explicit for traditional UK pension schemes than their peers. In Continental Europe customs are different (and equivalent Treasury debt instruments fractionally more generous). In the Netherlands inflation-linking of benefits has traditionally been optional, typically dependant on the investment returns achieved the year before. In pension plans in other countries, there is no direct linkage, but individual retirement adequacy is hugely determined by real as opposed to nominal returns. The difference is reflected in concerns about inflation as a risk to respondents’ twelve-month financial targets.

4 http://www.nber.org/papers/w18015

8

Financial risks

In order to achieve our financial investment targets for the next 12 months, I see inflation …

0 %

10 %

20 %

30 %

40 %

50 %

60 %

70 %

80 %

90 %

100 %


3.6 %

28.8 %

45.3 %

22.3 %

1.4 %

27.5 %

53.6 %

17.4 %

H1/2012H2/2011 H2/2012

4.6 %

28.8 %

54.2 %

12.4 %

One in ten UK respondents views inflation as a huge risk to their twelve-month targets; this is the highest level of concern ever in the history of RiskMonitor in this category. While almost 8 % of Dutch respondents also view inflation as a huge risk, unlike in the UK the numbers of Dutch in the next category have fallen away. So far fewer Dutch perceive inflation as a considerable risk. The three other countries where inflation risk is indubitably growing are France, Germany and Switzerland. Nearly half of all respondents from Germany and more than half from France now view inflation as a considerable threat to next year’s financial targets.

But the consequences of financial repression are not limited to fixed income alone. Clearly the issue is much bigger. Reinhart, Reinhart and Rogoff identify 26 debt overhangs (debt-to-GDP above 90 %) in their historical analysis. They claim economic growth slowed by 1.2 % during these periods of great indebtedness relative to other periods. As of end October, US debt to GDP was 102.9 %; UK’s was 82 %; Germany’s was 80 %; France’s was 86 %. So financial repression spells bad news long-term for most domestically oriented assets and investment strategies. In the short-term, the major problem with financial repression – of which quantitative easing has played a major role – is that it subordinates market fundamentals to political engineering.

“Markets have been driven by sentiment and quickly move from risk-on to risk-off without regard to fundamentals. Political announcements have been seen as positive and then evaporate when they achieve little. This will persist and shows little sign of improvement as politicians and bureaucrats are unable to really manage the problems of no growth, too much debt and high unemployment” says the CIO of a large UK pension scheme.

For this respondent, the consequence is that market volatility will persist in a “risk-on / risk-off” environment. This in turn suggests that the ‘quality’ of market volatility is deteriorating, because it has less to do with commercial fundamentals. If one subscribes to this belief, then it removes the shine from RiskMonitor conclusions. These are that overall market volatility is posing less and less of a risk to Europe’s institutional investors. A year ago we found 88.7 % of respondents felt overall market volatility was a major risk to their twelve-month financial targets. Six months later the percentage had fallen to 83.7 %. By November it was down to 74.6 %. The decline is even more apparent if we focus on those respondents who perceive overall market volatility as a huge risk: 27.9 % one year ago; 8.4 % now.

In order to achieve our financial investment targets for the next 12 months, I see overall market volatility …

H1/2012H2/2011H1/2011 H2/20120 %

10 %

20 %

30 %

40 %

50 %

60 %

70 %

80 %

90 %

100 %


7.7 %

64.7 %

25.6 %

1.9 %

22.2 %

61.5 %

16.3 %

27.9 %

60.8 %

10.0 %

1.4 %

8.4 %

66.2 %

24.0 %

1.3 %

9

Financial risks

The same downward trend is evident when investors were asked about the single biggest risk to meeting their financial targets. Overall market volatility has always occupied the top spot in RiskMonitor, but the number of mentions has declined with each of the last three editions. Before leaving this topic, it is worth reiterating one point made earlier: overall market volatility might be a lessening fear in investors’ minds, but its impact is greater when accompanying sheepish markets trending sideways. One more quote from a Dutch real estate investment manager summarises well:

“Overall volatility will affect all markets and drives investors in cash or AAA sovereign bonds, which will hurt most markets.”

In order to achieve our financial investment targets for the next 12 months, I see a sharp drop in equity markets …


0 %

10 %

20 %

30 %

40 %

50 %

60 %

70 %

80 %

90 %

100 %

H1/2012H2/2011H1/2011 H2/2012

9.7 %

54.8 %

32.9 %

2.6 %

15.3 %

54.7 %

25.5 %

4.4 %

20.3 %

61.6 %

15.9 %

2.2 %

13.7 %

61.4 %

22.2 %

2.6 %

In previous RiskMonitor surveys, investors have shown widespread recognition of the riskiness of equities within their total portfolios. This time is no exception as three-quarters of respondents view a sharp drop in equities as a major risk to their twelve-month targets. For Germans, Italians and the Swiss, this is a growing anxiety. For the Nordics and Dutch, worry is abating. One reason given for the overall decline in anxiety is the relative attractiveness of equities to its major competitor for investor capital: fixed income.

The equity-risk premium looks good, as a major Swiss multi-employer pension fund reminded us:

“Fair to cheap valuation should prevent a sharp drop in equities. Such occurrence would allow us to buy cheaper.”

In the face of financial repression, dividend-yielding stocks have a further appeal of providing income more bountifully than government debt. At the end of October, dividend yields on the MSCI Europe Index were 3.9 %. German 10-year bonds were yielding 1.43 %.

We explore further alternatives to government debt in Chapter 2. For now let us imagine the imbalance worsens as interest rates fall further. This is a creeping fear among European institutional investors. Just over 30 % classified falling rates as a major risk in the previous report; by now the percentage has climbed to over 40. Fears are more common and accentuated in Germany, Italy and Switzerland. One reason might be a different book value accounting of liabilities which in turn implies no interest rate sensitivity of liabilities. Hence, rising rates in this setup imply losses.

In order to achieve our financial investment targets for the next 12 months, I see falling interest rates …

0 %

10 %

20 %

30 %

40 %

50 %

60 %

70 %

80 %

90 %

100 %


14.1 %

28.1 %

40.7 %

17.0 %

10.4 %

20.9 %

45.5 %

23.1 %

H1/2012H2/2011 H2/2012

11.8 %

28.8 %

36.6 %

22.9 %

10

Financial risks

We have briefly mentioned the threat perceived by falling interest rates. When asked in a separate question of their single biggest fear, this issue garnered more responses in both Germany and the Netherlands than the second and third options put together. A French multi-employer pension fund pointed out that falling rates were so dangerous because they drove up the cost of insuring liabilities. Several other respondents expressed concern at their lack of full coverage of their liabilities in such an uncertain environment for investing.

Yet institutional investors are a heterogeneous bunch. To misquote Abraham Lincoln, you can’t please all the people all the time. So while rising interest rates would evidently take a weight off the minds of those respondents registering red in the chart above, for a growing minority of German and Nordic pension providers rising rates present a real problem.

In order to achieve our financial investment targets for the next 12 months, I see rising interest rates …

0 %

10 %

20 %

30 %

40 %

50 %

60 %

70 %

80 %

90 %

100 %


5.8 %

26.8 %

44.9 %

22.5 %

6.6 %

35.0 %

38.7 %

19.7 %

H1/2012H2/2011 H2/2012

7.2 %

26.3 %

44.1 %

22.4 %

A major Nordic wealth manager summed up this problem:

“The short term impact of raising interest rates for companies with issued guarantees and no hedge will impact on buffers and the Profit/Loss account more than many other factors.”

The Nordics are such well-regarded pioneers of interest and inflation hedges that it comes as a surprise to imagine there are institutions lacking such protection. Moreover, the trend among Nordic pension providers, notably in Sweden and Denmark, is to persuade their policyholders to forego guaranteed returns in favour of market returns with some optional bonus or minimum return, e. g. 0 %.

But there is a further point underlying this quote: return-seeking assets are not currently reliable enough to cover increased guarantees. Most Nordic regulators scrutinise inappropriate risk-taking and do not permit a lax mismatch between liabilities and investments. So we must conclude that times are hard and buffers slim even in this well-organised region for retirement provision; there is little risk capital left. Finally, it is worth noting that the most worried in this category, also for Germany, were mostly company-sponsored or local authority schemes rather than insurers.

11

Financial risks

A Sting in the tail

The Financial Crisis taught all investors a lesson or two. We are all now familiar with the concept of Black Swans. We are all now sceptical of diversification – or to be more precise, aware of its limitations. In every RiskMonitor, diversification has always been the most common response from investors as to how they deal with their biggest financial risk. So we know that belief holds strong (Note in the graph below that duration management has crept into second place, and fixed income hedging is also on the rise. Both answers fit with the concerns about current and future interest rates discussed previously). But every institution will also remember the frightening correlation of!almost all kinds of asset classes and strategies in September 2008.

How do you deal with your biggest financial risk?

Diversification 46.3 % (+6.4 %)*

Dynamic asset allocation 18.4 % (–2.7 %)

Duration management 11.8 % (+1.6 %)

Equity hedging 6.6 % (+1.5 %)

Fixed income hedging 6.6 % (+3.7 %)

Target risk portfolio 1.5 % (–2.7 %)

Other 8.8 % (+0.8 %)


Perhaps the ultimate lesson is that there are more powerful forces in the world than financial markets; this can be hard to remember when you’re living in a bubble. That has not been the case for a number of years and is evidenced by the considerable attention respondents consistently give to tail risk. It has been a huge risk over the past three RiskMonitor surveys to more or less 15 % of respondents. It has been a considerable risk to 45 % on average. Since the summer of 2012, respondents in Germany, the Netherlands and Switzerland have become particularly concerned – almost one-quarter of German institutional investors now hold tail risk as a huge threat to their twelve-month financial targets. In Switzerland, the number has risen from none in the first half of the year to one in five.

In order to achieve our financial investment targets for the next 12 months, I see tail risk …


0 %

10 %

20 %

30 %

40 %

50 %

60 %

70 %

80 %

90 %

100 %

H1/2012H2/2011H1/2011 H2/2012

9.9 %

38.4 %

41.7 %

9.3 %

14.2 %

40.3 %

43.3 %

2.2 %

16.9 %

45.6 %

33.1 %

4.4 %

15.2 %

48.3 %

33.1 %

3.3 %

A Black Swan by nature comes as a surprise and this is well observed by the investment manager of a Dutch corporate pension fund:

“Some of the major risks [RiskMonitor categorises] are clearly linked, we can imagine a tail risk coming from sharp equity markets declines, caused by a deepening of the sovereign debt crisis.”

We are reminded why tail risk is such a worry – it may be a terrible combination of damaging events that can be separated mentally in calculations but in reality appear simultaneously. In the following chapter, we consider further which issues are nightmarish for Europe’s institutional investors; and which remedies are available.

12

In order to achieve our financial investment targets for the next 12 months, I see limited liquidity …

0 %

10 %

20 %

30 %

40 %

50 %

60 %

70 %

80 %

90 %

100 %


3.5 %

18.8 %

46.5 %

31.3 %

3.7 %

36.0 %

45.6 %

14.7 %

11.7 %

32.8 %

43.8 %

11.7 %

H1/2012H2/2011H1/2011 H2/2012

7.1 %

35.1 %

45.5 %

12.3 %

In order to achieve our financial investment targets for the next 12 months, I see counterparty risk …

As a considerable riskAs a minor risk Not as a riskAs a huge risk

0 %

10 %

20 %

30 %

40 %

50 %

60 %

70 %

80 %

90 %

100 %

H1/2012H2/2011H1/2011 H2/2012

2.6 %

28.2 %

58.3 %

10.9 %

2.9 %

43.4 %

49.3 %

4.4 %

9.4 %

47.1 %

35.5 %

8.0 %

6.6 %

34.9 %

54.6 %

3.9 %

In order to achieve our financial investment targets for the next 12 months, I see deflation …

0 %

10 %

20 %

30 %

40 %

50 %

60 %

70 %

80 %

90 %

100 %


5.8 %

25.5 %

53.3 %

15.3 %

0.7 %

16.9 %

50.0 %

32.4 %

H1/2012H2/2011 H2/2012

2.0 %

22.0 %

59.3 %

16.7 %

In order to achieve our financial investment targets for the next 12 months, I see change in exchange rates …

H1/2012H2/2011H1/2011 H2/20120 %

10 %

20 %

30 %

40 %

50 %

60 %

70 %

80 %

90 %

100 %


1.9 %

35.3 %

51.9 %

10.9 %

2.2 %

30.7 %

54.0 %

13.1 %

2.9 %

35.8 %

51.1 %

10.2 %

1.3 %

25.7 %

61.2 %

11.8 %

Financial risks

13

Financial repression

Financial repressionThis time it’s difficult

We began the preceding chapter by discussing the re-evaluation or redefinition of safe havens. Fears on the creditworthiness of European member states may have abated, but investors’ purchases of sovereign debt more and more appear like a donation to the region’s immediate stability than a source of long-term returns for pension scheme members. Although RiskMonitor concentrates on a 12-month outlook, there is a sense in this edition that respondents are acknowledging the dawn of a much longer period of financial repression. In fact, one-quarter of respondents named this as the macro issue keeping them up at night, far more than the much discussed “fiscal cliff” in the U.S. or a slowing of China’s growth.

It should be quickly added, as the picture below illustrates, that the eurozone debt crisis troubles more than twice as many respondents. But the two problems surely go hand-in-hand. Investors may rightly fear that between an angry electorate and political sensitivities on the international level, they may be a far easier target for Treasuries seeking to creep out of indebtedness.

The question then becomes which route to take away from what once were safe havens but increasingly resemble costly dead ends. We asked investors for substitutes for

government bonds to generate reliable and sufficient yields. The overwhelming answer was corporate debt, appealing to more than two-thirds of the universe of respondents [in the chart on the next page percentages are exclusive of each other as respondents could each give up to three answers]. In France, corporate bonds attracted 85 % of respondents. This did not stop one Paris-based insurer warning of the dangers of a wholesale shift from govvies to credit:

“The low level of safe haven bond yields is fuelling a credit bubble. Not a risk in the short-term (and Solvency 2 will compress spreads further), but a significant one in the next 6 to 12 months.”

There is another consequence of the rising prices of corporate paper that is already manifesting itself as a short-term risk. The companies that back occupational pension schemes are required by international accounting standards to measure those liabilities using the discount rate of a corporate bond swap curve. When the prices of the related corporate bonds rise and spreads decrease as much as they have in 2012, then liabilities, on paper at least,!look bigger. Swaps can take care of such changes but!few institutions are that well-matched, not least because it sacrifices any opportunity to increase buffers. Towers Watson calculates that corporate pension liabilities for DAX 30 companies rose EUR 22 bn to EUR 281 bn in the first half of this year alone due to the rising price of corporate and government debt.

54.6 %Eurozonedebt crisis

25.0 %Financial

repression10.5 %

U.S. “fiscal cliff”5.9 %Slowing of China’s

growth momentum

Which macro topic keeps you awake at night?

14


We began this edition of RiskMonitor by referring back to the debate on ‘safe assets’ from the previous edition. We continue that debate here by looking at substitutes for government debt. The grim joke is that a risk-free return has become a return-free risk. And yet the asset class sectors of highly-rated debt and publicly-quoted equities, preferably denominated in a hard currency, have remained the traditional bedrock of investors’ portfolios, not least for reasons of liquidity. To these strata, quality real estate can be added.

But this edition of RiskMonitor suggests that the tectonic plates are shifting. It says something about the state of the world that more than one-third of investors feel emerging market bonds are a reliable and sufficient substitute for G10 government debt. Emerging market countries now hold close to 70 % of global reserves, versus around 30 % in the mid-1990s. The average yield for Asian EM debt, for example, is higher than median G7 debt – the HSBC Asian Local Bond Index registered a 6.1 % total return in US dollars for 2012 to the end of September. We must add immediately, however, that investors are not talking about entire substitution. As one German life insurer notes:

“These choices are obviously not surrogates for govvie bonds – we invest in covered bonds more to compensate.”

Nevertheless, the fact that 56 % of Dutch institutional investors, 55 % of Austrian investors and almost 48 % of their German peers feel comfortable using emerging market debt for secure returns is remarkable. Perhaps it is no coincidence that in both of the bigger countries, falling interest rates are named as the biggest risks to financial targets over the next twelve months.

Respondents from the Nordic region exhibit perhaps the most adventurous nature: for one in six investors, both emerging markets equities and private equity were deemed reliable substitutes for government debt. Another choice worth noting is the high interest from France in infrastructure debt. This attracted twice as many responses from France than the universe average of 14 %. From the UK, 24 % of respondents registered an interest, although this comes as less of a surprise as the National Association of Pension Funds there has liaised with the government to create a platform for infrastructure investment by UK pension plans.

Real estate was third most popular as a category, but second favourite among Swiss investors, attracting almost half the voters there. Finally, the fact that fewer than 10 % of respondents ticked the box for developed market equity is noteworthy. At the end of June, 80 % of dividend-paying shares in the S&P 500 were yielding more than Treasuries. But then, as with emerging market debt, Europe’s institutional investors already seem happier putting their money further afield: emerging market equities are more popular than developed equity as reliable substitutes to government bonds for yield generation. But as a concluding note of caution on the relative current attraction of emerging market equities: current average dividend yields in Asia of 3.1 % are lower than those in Europe.5

Traditional asset classes

10 %0 % 20 % 30 % 40 % 50 % 60 % 70 %

68.8 %

37.0 %

22.7 %

10.4 %

9.7 %

7.8 %

Corporate bonds

Emerging market bonds

Covered bonds

Emerging market equity

Developed market equity

Multi asset

Alternatives

Real estate

Infrastructure debt

Infrastructure equity

Private equity

Hedge funds

Commodities

10 %0 % 20 % 30 % 40 % 50 % 60 % 70 %

31.2 %

13.6 %

13.0 %

10.4 %

5.8 %

5.8 %

Where do you find a substitute for government bonds in order to generate reliable and sufficient yields?*

* up to three answers possible

5 Source: Datastream; MSCI Asia ex Japan, MSCI Europe as of 31!October!2012

15


Look East!

The strong showing of both emerging market debt and equity in the poll is explored further in this edition of RiskMonitor. We surveyed European institutional investors’ allocation and appetite for assets in Asia. Allocations and exposures are not exclusive, i. e. respondents could vote for more than one. Two-thirds of respondents have exposure to Asian equities. Regionally by response, the Swiss top the league with 85 %, followed by the Nordics with 75 %. Almost 36 % of the entire universe of respondents has exposure to Asian debt. Germany was notable here for its widespread interest: nearly 48 % of respondents have exposure. The Dutch came in second at 44 %.

Nearly one-third of the total universe acknowledged indirect exposure via large corporates doing significant business in the region. Only 15 % of respondents claim to have no allocation to Asia directly or indirectly. From France, the percentage was almost 29; from Germany, the percentage was almost 24. From the UK, on the other hand, fewer than 7 % of respondents claimed to have no exposure.

Looking to the future, almost three in five expect to raise their exposure. Given the strong fundamentals of the region, this may come as little surprise. In 2010, for example, Asian exports to the US were close to US$ 400!bn while imports from the US just US$ 158!bn. According to estimates by the Asian Development Bank, Asia will account

for about 50 % of global output by 2050 and China will likely have surpassed the U.S. as the world’s largest economic power in 20206. In 2012, Asia holds more than 60 % of the world's currency reserves and its local currency bond market has more than doubled since 2005, now accounting for 8 % of the global outstanding debt7. Thus, the majority of respondents are content to buy the Asian story.

One Dutch public-sector fund claimed:

“Asian equity = Asian bonds + International corporate equity in return, but with lower risk and better correlation.”

Not everyone, however, is happy looking East. Another asset manager owned by a Dutch pension fund said:

“Changes in the legal system are necessary to make this region more popular. The risk-return profile is getting too high; often this is visible via foreign currency movements.”

It is worth noting that while almost three in five respondents said they would invest more in Asia, the reverse was true in the Netherlands where 58 % said they would not. Only the Nordics were more hawkish, with almost 94 % declaring their allocation to Asia could only reduce from the present situation. Given the overall big appetite for investments in Asia across all of Europe, it is worth to look at what have been the peculiar obstacles thus far to investing in the Far East.

exposure Asian bondsfurther investments in Asia planned exposure to Asian equitiesEuropean average European average European average

80 % 60 % 40 % 20 % 0 % 20 % 40 % 60 % 80 % 100 %100 %

UK

Switzerland

Nordics

Italy

Germany

France

Austria

Netherlands

58 % 36 % 66 %

Appetite for assets in Asia is strong – regardless of existing exposure to the region

6 Source: Datastream; Allianz Global Investors Capital Market Analysis7 Source: Datastream as at March 2012; AsianBondsOnline

16

Fewer than one in twenty respondents have concerns about the economic fundamentals in Asia. More than 28 %, on the other hand, bemoaned the lack of transparency and difficulties in gathering information. The Dutch office of one global investment consultancy tartly replied that indirect investing in Asia was okay, but direct investing did not work. Many commentators contrasted the quantity and quality of commercial information available with that in Europe.

“Market characteristics are not sufficiently developed for the requirements of European standards,” said one Dutch real estate manager.

The CIO of a UK Corporate Pension Fund added that Asia is “less well known to the investment team and the trustees. More time needs to be spent understanding the risks and how different asset classes operate. And there is less transparency around these markets.”

Fundamental issues, such as the free float of quoted companies, remain. The Philippines’ stock exchange, for example, hopes to instigate a minimum 10 % free float by the end of 2012. On a sharper note, Transparency International’s Bribe Payer’s Index 2011 has just three Asian countries in the top half of countries surveyed (one of which was Japan) while six were in the bottom half, including China, where perceptions of corruption in the private sector are second only to Russia8. On the other hand, not just reliable centres such as Singapore and Hong Kong,

but now Malaysia and Thailand rank in the world’s top 20!countries for doing business. This is according to the International Finance Corporation and the World Bank’s measure of government rules and regulations on business .9

One in five respondents said exposure to Asia was bound by investment limits. The answer was more than one in four in Germany, whence one investment adviser made a clear plea to rethink such bounds:

“We believe that the limits should be increased because of the rising exposure of EM and because of the positive trend for many of the EM currencies.”

It is worth remembering that over the past five years, many Asian currencies have appreciated against the euro, British pound and US dollar. The Malaysian Ringgit has increased more than 22 % against the euro, for example. More significantly, the appreciation is expected to continue. Research by Allianz Global Investors suggests that major Asian currencies, with the exception of the Indonesian Rupiah, will appreciate in the coming decade by an average of 1 % annualised, with the Renminbi notably faster at 2.4 % annualised10.

While Malaysia, Cambodia, Korea, Singapore, Taiwan and Vietnam were all specifically mentioned by respondents as target destinations, the most popular countries were the most populous. Of those that stated a preference, 17 % said India; 24 % said China.

10 %

15 %

20 %

25 %

0 %

5 %

30 %

outlook compared with other regions

3.6 %

7.9 %

19.4 %

28.1 %

16.6 %

21.6 %

Weak fundamentalRegulatory hurdles

Risk considerations

Limits set by own investment

guidelines

Market characteristics(e.g. liquidity,market depth,

volatility)

Difficult information gathering/

transparency

What is the biggest obstacle for moving investments to Far East?

8 Bribe Payers Index 2011, Transparency International9 “Doing Business 2013” IFC and World Bank10 Allianz Global Investors “The Case for Emerging Market Currencies in the

Long Run”


17

It should be noted that another 24 % also made it clear that they are looking for broad country diversification.

There is a similar story when looking at asset class. While 7 % of respondents stated infrastructure and just over 10 % are looking to real estate – direct and indirect; there is more of a mix when discussing the major asset classes. Hence, equities attracted 55 % of respondents and bonds 41 %, but in many cases the same institutions are looking for broad exposure via both asset classes.


18

Regulatory and governance risks


Both regulatory and governance risks generally are not on the rise for Europe’s institutional investors. Even stricter regulation, regularly the biggest risk in this category, has ticked down over the second half of 2012.

In order to achieve our financial investment targets over the next 12 months, I see stricter regulation …


0 %

10 %

20 %

30 %

40 %

50 %

60 %

70 %

80 %

90 %

100 %

H1/2012H2/2011H1/2011 H2/2012

5.8 %

23.2 %

47.7 %

23.2 %

5.9 %

31.6 %

39.0 %

23.5 %

3.7 %

31.1 %

47.4 %

17.8 %

7.3 %

28.0 %

47.3 %

17.3 %

Drilling down to country level, however, reveals some interesting trends. Swiss and Nordic institutions seem more preoccupied than other regions by stricter regulations. They represent a major risk to twelve-month financial targets for a significant minority in these two places – 42.8 % in Switzerland and 40.3 % in the Nordic region.

The corporate pension fund of one Swiss multinational made the following observation:

“'Stricter regulations' are fine as long as this also means that responsibility is shifted over to the regulators.”

This sentiment will no doubt find sympathy in other countries where the regulators of pension providers are – by accident or design – taking much greater interest in institutions’ activities. James Dilworth, CEO of Allianz Global Investors Europe, made a plea in the previous edition for

regulators to maintain open minds on what constitutes safe assets in order to avoid pro-cyclical regulation. Earlier this year, a Rotterdam Court overturned the Dutch regulator’s demand on an industry-wide pension fund to greatly reduce its exposure to gold.

Interestingly, the Netherlands was third most worried country about stricter regulation. A national reform package introduced this autumn included a new discount rate, the Ultimate Forward Rate (UFR), for liabilities with a duration of longer than 20 years. One Dutch fiduciary manager, which labelled stricter regulation a huge risk, disclosed that it had had to unwind some long-term interest rate swaps for clients in response to UFR’s introduction. Although in Germany, 47.6 % of respondents classified stricter regulations as a considerable risk, no one here deemed it to be huge.

In order to achieve our financial investment targets over the next 12 months, I see limited own risk management capabilities...

H1/2012H2/2011H1/2011 H2/20120 %

10 %

20 %

30 %

40 %

50 %

60 %

70 %

80 %

90 %

100 %


0.7 %

12.7 %

56.7 %

30.0 %

2.2 %

17.5 %

54.7 %

25.5 %

2.2 %

20.3 %

47.1 %

30.4 %

1.3 %

20.4 %

57.2 %

21.1 %

We find differences again between the general and country-level results on the topic of in-house capabilities to monitor and manage risk. In general, this risk has fallen slightly over one year, but gently risen over the past six months, notwithstanding the higher efforts and resources institutional investors planned to commit to this area11. So, no strong change of directions; and indeed one in five respondents currently say their own risk management capabilities pose no threat at all to twelve-month financial targets. On the country level, however, other trends

11 More than 54 % of the respondents said that in 2012, they planned to spend more in order to deal with governance and regulatory risk than in the previous year. Only 3% said they would spend less. Cf. RiskMonitor “Rethinking Safety“.

19


manifest themselves. In Germany, for example, the issue is growing, albeit at a low level. When the opinions of German institutions were first canvassed four editions ago, 46 % declared that in-house risk management was no cause for concern. To now, that percentage has dwindled to 14 %. Having said this, German-based respondents are still not greatly perturbed. The sense that internal processes must be improved is strongest in neighbouring Switzerland, where one-third of respondents reckon their own risk management capabilities pose a considerable risk.

In order to achieve our financial investment targets over the next 12 months, I see rising reporting requirements …


0 %

10 %

20 %

30 %

40 %

50 %

60 %

70 %

80 %

90 %

100 %

H1/2012H2/2011H1/2011 H2/2012

2.0 %

18.3 %

47.7 %

32.0 %

2.2 %

19.0 %

44.5 %

34.3 %

15.1 %

51.1 %

33.8 %

3.3 %

17.8 %

54.6 %

24.3 %

Fears over rising reporting requirements are found in similar places as fears over stricter regulation: The Netherlands, Nordics and Switzerland are the only countries or region where rising reporting requirements are deemed a huge risk (albeit by a small minority). In Italy, by contrast, either regulators must be resting their pens or the country’s pension providers are extremely well managed. Here, rising reporting requirements represent a negligible risk to all respondents. The UK is almost as confident: 93 % of respondents registered similar sentiments.

These first three issues score highest when we asked respondents for their biggest single risk from regulation or governance.

Which of is your biggest governance and regulatory risk in the next 12 months?

Stricter regulation 32.7 % (–5.1 %)*

Limited own risk management capabilities

25.3 % (+6.0 %)

Rising reporting requirements 17.3 % (+11.6 %)

Organisational complexity 10.0 % (–3.3 %)

Pressure from sponsor 8.0 % (–4.6 %)

Other 2.7 % (+0.5 %)

Pressure from trustees 2.0 % (–3.2 %)

Heterogeneity of investmentset-ups cross-border

2.0 % (–1.0 %)


While stricter regulation remains the prime concern, it has lost as many votes as own-capability limits gained. But the fastest riser has been rising reporting requirements, attracting nearly 12 % more respondents. Other issues such as organisational complexity and pressure from sponsors also make a significant showing.

We have undertaken additional analysis of respondents’ remedies for dealing with these biggest risks. The most popular response is to improve in-house capabilities: we find one-fifth of the respondents raising existing comprehension of risk or recruiting new staff. A similar share of respondents has or is updating their processes and systems – this answer applies to the issue of organisational complexity, as much as limitations of capability and rising reporting requirements.

One Dutch pension fund said of organisational complexity:

“It concerns internal organisation and has directly nothing to do with the asset management. I cannot change anything, so I observe, adapt and integrate the new structures into my working environment.”

Noteworthy is that both these remedies are more popular than increased outsourcing. The one exception here regards fiduciary management. Nearly one in ten respondents said that they had or would adopt fiduciary management to cope with the twin burdens of regulation and governance.

Two other kinds of activity are communicated by the rest of the responses. The first is lobbying, notably in response

20

to stricter regulations. More than one in ten respondents said that they lobbied authorities to have their voice heard. But the final action was even more popular and especially relevant to pressure from sponsors and trustees: communication.

“We share information with the sponsor and advisor and have fruitful discussions in order to prevent the sponsor feeling not in control,” said the asset manager of one Dutch corporate pension fund.

A UK peer saw a more direct but equally valid reason for communicating: “to manage expectations”.

But we conclude on a most relevant summary of how pension fund management ought to be, from the Norwegian subsidiary of a multinational giant:

“Reduced risk on investments, more complex risk monitoring.”

There seems no more fitting way to end a survey of the habits, fears and aspirations of Europe’s institutional investors regarding risk.


21

In order to achieve our financial investment targets for the next 12 months, I see heterogeneity of cross-border set-up …

0 %

10 %

20 %

30 %

40 %

50 %

60 %

70 %

80 %

90 %

100 %

H1/2012H2/2011H1/2011 H2/2012


7.0 %

37.1 %

55.9 %

0.8 %

10.5 %

43.6 %

45.1 %

0.7 %7.3 %

55.3 %

36.7 %

8.7 %

48.0 %

43.3 %

In order to achieve our financial investment targets for the next 12 months, I see organisational complexity …

0 %

10 %

20 %

30 %

40 %

50 %

60 %

70 %

80 %

90 %

100 %


1.3 %10.6 %

49.0 %

39.1 %

0.7 %

20.0 %

41.5 %

37.8 %

2,6 %

17,1 %

57,2 %

23 %

1.4 %

15.2 %

43.5 %

39.9 %

H1/2012H2/2011H1/2011 H2/2012

In order to achieve our financial investment targets for the next 12 months, I see pressure from trustees …

0 %

10 %

20 %

30 %

40 %

50 %

60 %

70 %

80 %

90 %

100 %


1.5 %8.9 %

28.7 %

61.0 %

0.9 %

11.3 %

41.7 %

46.1 %

15.3 %

42.7 %

42.0 %

1.9 %

19.4 %

44.4 %

34.3 %

H1/2012H2/2011H1/2011 H2/2012

In order to achieve our financial investment targets for the next 12 months, I see pressure from sponsor …

H2/2011H1/2011 H2/2012H1/2012


0 %

10 %

20 %

30 %

40 %

50 %

60 %

70 %

80 %

90 %

100 %

2.3 %

10.5 %

30.1 %

57.1 %

3.3 %

15.8 %

34.2 %

46.7 %

1.9 %

18.1 %

47.6 %

32.4 %

3.7 %

16.4 %

42.5 %

37.3 %


22

Results at a glance

Results at a glanceEurope

Financial Risks*

Regulatory and Governance Risks*

Italy 9.0 %

Nordics 18.1 %

The Netherlands 16.8 %

Germany 13.5 %

Switzerland 13.5 %

France 5.8 %

Austria 4.5 %

UK 18.7 %

Life Insurance 10.3 %

Pension fund – Multi-employer 12.9 %

Consultant 12.9 %

Pension fund – Public Sector 12.9 %

Corporate/Treasury 4.5 %

Foundation/non-profit 2.6%

Other 17.5%

Pension fund – Corporate 26.5 %

Other 32.3%

Head of investment 5.2 %

Chief risk officer 2.6 %

Chief executive 9.7 %

Portfolio manager 9.0 %

Chief investment officer 13.6 %

Risk manager 10.3 %

Pensions manager/head of pensions 17.4 %

Respondents by Type of Organisation Total Respondents: 155

Respondents by CountryTotal AuM/AuA (" bn): 1,934.5

Respondents by Most Popular Occupation

In order to achieve our financial investment targets for the next 12 months, I see…


* in % of responses, ranked by share of “huge” and “considerable” risk combined; ** Choice within all categories or free text

What is your biggest financial risk in the next 12 months?**

Market volatility20.7 %

RE

F

Deflation

Changes in exchange rates

Inflation

Rising interest rates

Falling interest rates

Counterparty risk

Limited liquidity

Tail risks

Current interest rate levels

Sovereign debt risk

Overall market volatility

Sharp drop in equity markets

8.4 66.2 24 1.3

13.2 55.3 27.6 3.9

15.2 48.3 33.1

6.6 34.9 54.6 3.9

4.6 28.8 54.2 12.4

25.71.3 61.2 11.8

3.3

7.2 26.3 44.1 22.4

11.8 28.8 36.6 22.9

2.0 22.0 59.3 16.7

35.17.1 45.5 12.3

20.6 46.5 28.4 4.5

13.7 61.4 22.2 2.6

21.2 52.6 24.1 2.2

22.2 61.5 16.3

14.2 40.3 43.3

10.4 20.9 45.5 23.1

2.9 43.4 49.3 4.4

30.72.2 54.0 13.1

2.2

6.6 35.0 38.7 19.7

1.4 27.5 53.6 17.4

0.7 16.9 50.0 32.4

36.03.7 45.6 14.7

19.9 44.9 30.9 4.4

15.3 54.7 25.5 4.4

0 20 40 60 80 100

As a huge risk As a considerable risk As a minor risk Not as a riskAs a huge risk As a considerable risk As a minor risk Not as a risk

H1/2012H2/2012

Heterogeneity of investment set ups cross-border

Pressure from trustees

Organisational complexity

Pressure from sponsor

Rising reporting requirements


Stricter regulation

2.2 17.5 54.7 25.5

11.30.9 41.7 46.1

10.50.8 43.6 45.1

0.7 20.0 41.5 37.8

2.2 19.0 44.5 34.3

15.83.3 34.2 46.7

31.65.9 39.0 23.5

3.7 16.4 42.5 37.3

20.41.3 57.2 21.1

0.7 7.3 55.3 36.7

3.3 17.8 54.6 24.3

15.3 42.7 42.0

2.6 17.1 57.2 23.0

28.07.3 47.3 17.3

0 20 40 60 80 100

Which of those mentioned is your biggest governance and regulatory risk in the next 12 months?**

Stricter regulation32.7 %

23

Results at a glance

Results at a glanceAustria

Financial Risks*


Other 11.1 %

Pension fund –Corporate 11.1 %


Corporate/Treasury 11.1 %

Pension fund –Multi-employer 44.4 %

>" 5bn: 22.2 %

" 1-5bn: 33.3 %

<" 1bn: 44.4 %


Respondents by AuM/AuATotal AuM/AuA (" bn): 28.6




Market volatility and Rising interest rates22.2 % each

RA

F

Deflation



Inflation

Limited liquidity



Sovereign debt risk

Counterparty risk



Tail risks 66.7 33.3

11.1 66.7 22.2

44.4 55.6

11.1 55.6 22.2 11.1

12.5 50.0 37.5

11.1

12.5 87.5

11.1 11.1 55.6 22.2

50.0 50.0

37.5 50.0 12.5

62.5 25.0 12.5

22.2 33.3 33.3 11.162.512.5 12.5 12.5

25.0 37.5

11.1 77.825.0 50.0 25.0

44.411.1 44.412.5 75.0 12.5

50.0 50.0

71.4 28.6

37.5

50.0 50.0

44.455.625.0 12.562.5

33.3 55.637.5 62.5

0 20 40 60 80 100


H1/2012H2/2012







Stricter regulation

44.4 22.2

11.1 77.8 11.1

77.8 22.2

14.3 57.1 28.6

12.5 75.0 12.5

14.3 14.3 57.1 14.3

62.5 37.5

33.3

12.5 25.0 37.5

12.5 50.0 25.0 12.5

37.5 37.5 25.0

33.3 33.3 33.3

50.012.5 25.0 12.5

12.5 25.0 37.5 25.0

37.525.0 37.5

25.0

0 20 40 60 80 100


Stricter regulation 62.5 %

Coveredbonds33.3 %

CorporatebondsCb66.7 % 55.6 % Emerging

market bonds

Where do you find a substitute for goverment bonds in order to generate reliable and sufficient yields?Top 3 mentions


24

Results at a glance

Results at a glanceFrance

Financial Risks*




Consultant 14.3 %Pension fund –Public Sector 28.6 %Corporate/Treasury 14.3 %

Life insurance 14.3% <" 1bn 28.6 %

" 1-5bn: 14.3 %

>" 5bn: 57.1 %




What is your biggest financial risk in the next 12 months? **

Current interest rates42.9 %

RF

F


Deflation


Tail risks

Limited liquidity

Inflation





Counterparty risk

Sovereign debt risk

14.3 71.4 14.3

71.4 28.6

57.1 42.9

14.357.1 28.6

57.1 14.3 28.6

14.3 85.7

14.3 85.7

85.7 14.3

50.0 50.0

28.6 71.4

28.6 42.9 28.6

28.6 57.1 14.3

25.0 50.0 25.0

12.5 37.5 50.0

28.6 14.3 42.9 14.3

37.5 25.0 37.5

12.5 62.5 25.0

12.5 75.0 12.5

37.5 62.5

12.5 37.5 50.0

50.0 25.0 25.0

25.0 25.0 50.0

50.0 50.0

25.0 75.0

0 20 40 60 80 100


H1/2012H2/2012


Limited own risk management



Stricter regulation


Pressure from trustees25.0 25.0 50.0

25.0 37.5 37.5

71.414.3 14.3

25.0 37.5 37.5

40.0 20.0 40.0

12.5 25.0 37.5 25.0

25.0 50.0 25.042.9 57.1

14.3 71.4 14.3

57.114.3 28.6

33.3 66.7

25.0 25.0 50.0

16.7 66.7 16.7

50.0 50.0

0 20 40 60 80 100




Limited own risk management capabilities 42.9 %

Covered bonds /Infrastructure debt (each)

28.6 %Corporatebonds

f O i i

Cb85.7 % 57.1 % Real estate


25

Results at a glance

Results at a glanceGermany

Financial Risks*


<" 1bn 33.3 %

" 1-5bn: 47.6 %

>" 5bn: 19.0 %





Falling interest rates28.6 %

RG

F



Inflation


Limited liquidity

Counterparty risk

Deflation



Tail risks


Sovereign debt risk39.3 46.4 14.3

32.1 50.0 14.3 3.6

3.6 46.4 46.4 3.6

28.63.6 42.9 25.0

3.6 57.1 28.6 10.7

7.1 50.0 28.6 14.3

7.4 48.1 44.4

3.6 39.3 46.4 10.7

7.1 67.9 21.4 3.6

29.6 55.6 14.8

85.79.5 4.8

23.8 61.9 14.3

4.8 71.4 23,8

4.8 47.6 33.3 14.3

23.814.3 42.9 19.0

52.6 21.1 26.3

9.5 42.9 47.6

7.7 15.4 50.0 26.919.0 28.6 33.3 19.0

7.1 32.1 39.3 21.447.6 38.1 14.3

23.8 66.7 9.5

9.5 76.2 9.5 4.8

23,8 61,9 14,3

0 20 40 60 80 100


H1/2012H2/2012







Stricter regulation

14.3 71.4 14.3

5.0 50.0 45.0

28.6 47.6 23.8

9.5 33.3 57.1

14.3 66.7 19.0

10.0 50.0 40.0

47.6 38.1 14.3

21.43.6

35.7 39.3

8.0 28.0 64.0

7.1 46.4 46.4

15.4 30.8 53.8

3.6 21.4

50.0 25.0

17.9 39.3 42.9

40.73.7 33.3 22.2

0 20 40 60 80 100





Corporate/Treasury 19.1 %Foundation/non-profit 4.8 %


Consultant 9.5 %

Other 23.9 %


Pension fund – Public Sector 9.5 %


Real estate38.1 %CorporatebondsCb66.7 % 47.8 %



26

Results at a glance

Results at a glanceItaly

Financial Risks*


Foundation/Charity or other Non-profit 7.1 %

Other 28.6 %




Pension fund –Public Sector 14.3 %

<" 1bn 50.0 %

" 1-5bn: 21.4 %

>" 5bn: 28.6 %






RI

F


Deflation


Counterparts risks

Tail risks

Inflation


Limited liquidity


Sovereign debt risk



23.1 53.8 23.1

23.1 53.8 23.1

7.7 38.5 53.8

35.7 7.157.1

28.6 64.3 7.1

7.7 23.1 38.5 30.8

61.523.1 15.4

25.08.3 66.7

23.17.7 69.2

28.6 21.4 50.0

21.4 28.6 28.6 21.4

50.028.6 21.4

44.4 33.3 22.2

12.5 75.0 12.5

11.1 22.2 55.6 11.1

55.6 44.4

25.0 75.0

22.2 22.2 55.6

11.1 88.9

11.1 44.4 44.4

88.9 11.1

44.411.1 44.4

44.4 55.6

33.322.2 44.4

0 20 40 60 80 100


H1/2012H2/2012




Stricter regulation




28.67.1 50.0 14.3

69.27.7 23.1

84.6 15.4

9.1 45.5 45.5

27.3 36,4 36.4

15.4 61.5 23.1

53.8 46.2

44.4 33.3 22.2

55.611.1 33.3

66.711.1 22.2

71.4 28.6

66.7 33.3

22.2 44.4 33.3

33.3 55.6 11.1

0 20 40 60 80 100




Limited own risk management capabilities 53.9 %

Coveredbonds

21.4 %CorporatebondsCb71.4 % 35.7 % Real estate


27

Results at a glance

Results at a glanceNetherlands

Financial Risks*


Consultant 15.4 %

Family office 3.9 %

Pension fund –Corporate 38.5 %Life Insurance 15.4 %

Other 11.5 %

Pension Fund – Public Sector 7.7 %Pension Fund – Multi-employer 7.7 % <" 1bn: 46.2 %

>" 5bn: 30.8 %

" 1-5bn: 23.1 %





Falling interest rates38.5 %

RN

F



Inflation

Deflation

Counterparty risk

Limited liquidity



Sovereign debt risk


Tail risks

Current interest rate levels 57.719.2 23.1

15.4 61.5 19.2 3.8

11.5 61.5 23.1 3.8

23.1 46.2 23.1 7.7

7.7 38.5 46.2 7.7

3.8 34.6 61.5

8.0 28.0 44.0 20.0

7.7 19.2 57.7 15.4

3.8 19.2 42.3 34.6

19.2 57.7 15.4

24.0 68.0 8.0

11.1 72.2 16.7

77.85.6 11.1 5.6

27.8 27.8 38.9 5.6

72.0 24.0 4.011.1 72.2 16.7

12.0 60.0 24.0 4.077.8 22.2

22.2 44.4 22.2 11.1

44.4 22.233.3

33.338.9 27.8

55.6 16.727.8

23.5 35.3 41.2

16.7 72.2 11.1

55.6 38.9 5.6

0 20 40 60 80 100


H1/2012H2/2012







Stricter regulation 30.87.7 50.0 11.5

19.27.7 57.7 15.4

23.13.8 53.8 19.2

25.0 45.8 29.2

16.04.0 56.0 24.0

11.57.7 65.4 15.4

11.5 73.1 15.4

33.3 50.0 16.7

12.512.5 25.0 50.0

23.5 41.2 35.3

6.3 56.3 37.5

22.2 50.0 27.5

38.95.6 55.6

16.7 50.0 33.3

0 20 40 60 80 100




Limited own risk management capabilities28.0 %

Real estate28.0 %CorporatebondsCb60.0 % 56.0 % Emerging

market bonds


28

Results at a glance

Results at a glanceNordics

Financial Risks*


Deflation

Inflation



Counterparty risk


Limited liquidity

Tail risks


Sovereign debt risk



5.0 20.0 60.0 15.0

10.7 75.0 14.3

14.3 64.3 17.9 3.6

7.4 55.6 29.6 7.4

7.1 50.0 39.3 3.6

7.4 40.7 44.4 7.4

10.7 32.1 39.3 17.9

11.1 29.6 40.7 18.5

26.9 57.7 15.4

25.9 59.3 14.8

3.7 14.8 55.6 25.9

3.8 3.8 73.1 19.2

3.7 70.4 25.9

19.0 81.0

19.0 66.7 14.3

9.5 38.1 47.6 4.8

19.0 33.3 38.1 9.5

9.5 33.3 52.4 4.8

14.34.8 42.9 38.1

9.5 57.1 33.3

9.5 14.3 52.4 23.8

15.05.0 65.0 15.0

23.8 61.9 14.3

4.8 19.0 52.4 23.8

0 20 40 60 80 100

Consultant 3.6 %



Other 14.3 %Corporate/Treasury 3.6 %


Foundation/Charity or other Non-profit 3.6 %


<" 1bn 32.1 %

>" 5bn: 46.4 %

" 1-5bn: 21.4 %

Respondents by Type of Organisation Total Respondents: 28 (Denmark: 7, Finland: 6, Norway: 5, Sweden: 10)



What is your biggest financial risk in the next 12 months? **

Sharp drop in equity markets39.3 %

N

FF

RRNN


H1/2012H2/2012







Stricter regulation

3.8 7.7 61.5 26.9

25.914.8 40.7 18.5

21.47.1 50.0 21.4

4.2 37.5 58.3

57.77.7 34.6

61.53.8 34.6

30.4 69.6

9.5 71.4 19.0

33.34.8 28.6 33.3

23.84.8 33.3 38.1

5.6 27.8 66.7

28.64.8 66.7

40.05.0 55.0

31.3 68.8

0 20 40 60 80 100




Stricter regulation 42.9 %

Covered bonds

28.6 %CorporatebondsCb71.4 % 35.7 %



29

Results at a glance

Results at a glanceSwitzerland

Financial Risks*


Pension fund –Multi-employer 14.3 %Consultant 14.3 %

Pension fund – Corporate 28.6 %Other 23.8 %Pension fund –Public Sector 4.8 %Life Insurance 4.8 %Foundation/Charity or other Non-profit 4.8 %Family office 4.8 % " 1-5bn: 23.8 %

<" 1bn: 57.1 %

>" 5bn: 19.0 %





Current interest rates33.3 %

54.5 45.5

58.38.3 25 8.3

8.3 50.0 41.7

8.3 75 16.7

50.0 50.0

16.7 25.0 50.0 8.3

41.7 41.7 16.7

8.3 66.7 25

16.7 41.7 41.7

Falling Interest rates

Deflation

Inflation

Limited liquidity



Counterparty risk


Sovereign debt risk


Tail risks


19.0 52.4 19.0 9.5

19.0 47.6 33.3

25 7523.8 38.1 38.1

14.3 38.1 47.6

16.7 66.7 16.74.8 23.8 57.1 14.3

4.8 19.0 38.1 38.1

25 58.3 16.728.6 61.9 9.5

9.5 42.9 33.3 14.3

4.8 28.6 52.4 14.3

33.3 52.4 14.3

4.8 57.1 38.1

38.1 38.1 9.514.3

0 20 40 60 80 100


H1/2012H2/2012

33.3 33.3 33.3

4.8 9.5 57.1 28.645.527.3 27.3

50.010.0 40.0

16.7 33.3 50.0

33.3 22.2 44.4

20.05.0 55.0 20.0

19.0 47.623.8 9.536.427.3 18.2 18.2

40.020.0 40.0

9.1 36.49.1 45.5

10.0 30.010.0 50.0

10.0 70.0 20.0

40.0 40.0 20.0




Organisational Complexity



Stricter regulation

0 20 40 60 80 100






30.1 %CorporatebondsCb76.2 % 47.6 % Real estate


30

Results at a glance

Results at a glanceUnited Kingdom

Financial Risks*




Other 13.8 %

Consultant 31.0 %>" 5bn: 31.0 %

" 1-5bn: 37.9 %

<" 1bn 31.0 %






RU

F

Deflation



Counterparty risks

Limited liquidity

Inflation

Sovereign debt risk



Tail risks



10.3 62.1 27.6

3.6 50.0 46.4

31.010.3 55.2 3.4

17.2 69.0 13.8

69.010.33.4 17.2

24.13.4 62.1 10.3

37.910.3 41.4 10.3

10.7 67.9 21.4

25.8 48.4 25.8

3.4 37.9 58.6

31.3 65.6 3.1

20.73.4 72.4 3.432.3 64.5 3.2

13.8 34.5 27.6 24.120.0 23.3 30.0 26.7

21.9 50.0 28.1

18.8 50.0 31.3

33.3 63.3 3.3

20.73.4 31.0 44.837.525.0 37.5

18.8 37.5 40.6 3.1

6.9 41.4 44.8 6.96.5 45.2 41.9 6.5

25.8 41.9 29.0 3.2

0 20 40 60 80 100


H1/2012H2/2012




Stricter regulation




21.7 47.8 30.4

7.1 50.0 42.9

3.4 37.9 58.6

10.3 55.2 34.5

17.2 58.6 24.1

13.8 51.7 34.5

24.08.0 44.0 24.0

20.7 41.4 37.9

6.3 56.3 37.5

3.2 6.5 38.7 51.6

3.1 53.1 43.8

20.7 44.8 34.5

12.5 65.6 21.9

21.9 50.0 28.1

0 20 40 60 80 100




Limited own risk management capabilities and Stricter regulation25.0 % each

Real estate /Infrastructure debt (each)

24.1 %CorporatebondsCb65.5 % 27.6 %



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Allianz Global Investors Risk Monitor #4

Economy & Finance

Transcript of Allianz Global Investors Risk Monitor #4