Firm believers in active asset management do not always have it easy in the public debate. Yet they have also had it tougher. This is because, in the long-standing controversy about active versus passive fund management, the debate is gradually becoming objective – and thankfully so. Each of these approaches has its raison d‘être; neither is the only true path. Nonetheless, there are good reasons for asset managers to adopt a clear position. We have done so and remain committed: Allianz Global Investors (AllianzGI) is an active manager. We refer to four globally observable trends in the industry to illustrate this.
Update Magazine II/2018
Divergence has advantages
The first trend – to take the bull by the horns, so to speak:
the popularity of passive strategies provides an opportunity
for real active management. In the bond sector, the
advantages of a deliberate deviation from the index are
obvious, as the largest borrower (not always the most solid
one) holds the largest weighting in the index. This applies to
German equities, too: since the low point in the spring of
2009, investors have been able to make up a lot of ground
against the DAX just by underweighting utilities and banks.
The prices of these two sectors are still below the level of
March 2009, while over the same period the DAX has more
than tripled. Even more opportunities are provided by multiasset
strategies, which have held first place by a wide margin in
European sales statistics over the last 15 years: an analysis
by AllianzGI indicates that European private investors have
entrusted around EUR 870 billion to this asset class since
2002. The built-in diversification and flexibility, i.e. the
opportunity for active reallocation, are the trump cards
that the asset class can use to its best advantage.
All this shows that even in a world in which the market return – beta – can be achieved cheaply via passive products, there is an opportunity for active strategies and active management. Even in the implementation of an investment strategy consisting entirely of passive instruments, most customers need “active“ support. In addition, it is a myth that investors always receive exactly the performance of the associated index with an ETF. The DAX, for example, is a performance index, which includes the dividends that are paid out. Since taxes are payable on dividends, however, a DAX ETF is systematically lower than the index. In the case of ETFs on less liquid market segments, such as high-yield bonds, index and ETF perform differently in difficult market situations, because some of the securities included in the index are no longer tradable. We last saw this situation in February, and as the ECB exits the corporate bond market, we may experience it more often. This suggests at least a more complex balance between active and passive management than we usually find.
Myth of exact tracking
A second globally observable trend is the increasing importance of alternative investments. When the expected yield for supposedly "safe" investments (government bonds with the highest credit ratings) is almost zero or is negative, not least with serious repercussions for the portfolios of pension institutions, more depends on additional income – alpha. The charm of alternatives is not only that they have return potential, but that this is also uncorrelated with other asset classes. In addition, the market for illiquid alternatives such as infrastructure or private financing is growing strong: capital supply has its counterpart in fastgrowing capital demand. As an example, this is reflected in the growth of Alternative Investments at AllianzGI. Between 2013 and 2018, the assets under management in that sector have increased thirty-fold through organic and inorganic growth – from the original EUR 2 billion to more than EUR 60 billion now. Actually, the term “alternatives”, as a catch-all for strategies that are not plain vanilla equity, bond or multi-asset investments, has not lived up to the importance of this asset class for quite a long time. It is often overlooked that the assets managed within this strategy have, according to the Boston Consulting Group, grown just as strongly as the more passive investment strategies in the last 15 years. This trend may continue. And alternatives are pure active management.
Sustainability becoming more important
The third global trend is the increasing importance of ESG aspects when making capital investments. The Global Sustainable Investment Alliance (GSIA), a worldwide association of organisations for promoting sustainable investing, reports that the total volume of responsibly managed investments rose by a quarter between 2014 and 2016 alone, to nearly USD 23 trillion. More than half of this amount (USD 12 trillion) is managed in Europe. An important note in this context is that investing while taking into account environmental (E), social (S) or governance (G) aspects does not automatically mean exclusion criteria and investment bans. A number of clients are looking for exactly this, or are interested in impact investing, i.e. investments that explicitly promote well-defined ecological or social causes. For some other clients, on the other hand, this is not what they are looking for. So precisely for these clients, there is a third way: integrated ESG research. This is AllianzGI‘s alternative for those who are not seeking direct SRI products, but who would like to make sure that the main ESG risks are taken into account in the investment process. The objective in doing so is to identify and avoid “ESG torpedoes” in the research process, i.e. ESG risks that may seriously threaten the share price. At the same time, however, investment opportunities should also be used actively, resulting from the fact that companies redefine their strategy on the basis of dialogue with critical analysts and portfolio managers. In the US especially, integrated ESG research already plays a major role, according to GSIA figures. This alternative approach still has some potential for catching up in Europe.
Client focus put into practice
Lastly, the fourth trend is based on the recognition that the
justification for the existence of active asset management
is not based solely in achieving an outperformance of any
type. It is based rather more on a trusting and added
value-creating client relationship. This starts with advisory
services, but can go much further. As the highest level of
the cooperation known from fiduciary management (this
would include the preparation of strategic asset allocation,
the development of the investment strategy, selection
of portfolio managers, risk management, reporting), the
investment value chain is fully outsourced to delegated/
outsourced CIO services. This means that both the decisionmaking
authority and responsibility are delegated to
the asset manager. This requires a very special close
relationship of trust between client and asset manager.
The partnership is raised to a new level. Common values
can only emerge over the long term if they are shared, i.e.
“Shared Value”. Consequently, critical factors in the success
of an asset manager are, above all, genuine client focus
put into practice, in addition to extensive expertise (both
geographical and asset class-related) and time-tested risk
Active advice essential
Our many discussions with clients reveal that these four trends, observable worldwide, are on investors’ minds. Many appreciate comprehensive and active asset management, not least because experience shows that investment objectives are primarily missed due to investment strategies that have been established or implemented inadequately. As a result, we believe active advice and active management will continue to be essential in the future, in order to create value together with clients and on their behalf.
This article was first published as part of Update Magazine.
There is no guarantee that actively managed investments will outperform the broader market.
Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.
The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted.
This material has not been reviewed by any regulatory authorities. In mainland China, it is used only as supporting material to the offshore investment products offered by commercial banks under the Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations.
This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors U.S. LLC, an investment adviser registered with the U.S. Securities and Exchange Commission; Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors (Schweiz) AG, licensed by FINMA (www.finma.ch) for distribution and by OAKBV (Oberaufsichtskommission berufliche Vorsorge) for asset management related to occupational pensions in Switzerland; Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424, Member of Japan Investment Advisers Association and Investment Trust Association, Japan];and Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan.
Tobias C. Pross
Andreas Utermann, CEO and Global CIO, Allianz Global Investors, talks to Kerstin Keller, Head of Institutional Marketing and Editor-in- Chief Update Magazine, about the new brand positioning “Active is”.