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Taking on 'Smart Risk' With a Multi-Asset Approach

Dennis Nacken | 18/04/2016
"Smart risk" with multi-asset solutions

Summary

In this low-interest rate environment, the biggest risk may be not taking any. Find out how multi-asset strategies that put "smart risk on autopilot" may be able to help investors reduce risks without missing out on returns.

Multi-asset strategies for outwitting oneself

Investors often react emotionally and irrationally, according to experts in behavioural finance. For example, investors often have limited visibility due to inadequate information. The window, or rather the window frame, through which they observe the world of investments is simply not big enough to provide a view of all the necessary information, investment alternatives or contradictory facts. In addition, they often exhibit a home bias – a preference for securities from companies in their own country. The result: they lack diversification and ignore better alternatives. Multi-asset strategies can help investors to outsmart themselves – easily and automatically.

Why taking on 'smart risk' is key

In this low-interest rate environment, we believe the biggest risk is not taking any risk at all. When making investment decisions, "smart risk" is crucial.

Multi-asset solutions can be considered an attractive form of investment because, thanks to the broad spectrum of investment opportunities and the flexible use of trends, investors can take advantage of numerous opportunities for returns worldwide whilst simultaneously achieving a balanced risk structure for their investments.

This is a form of “autopilot” that helps investors to reduce risks without foregoing opportunities for returns.


For more information, read Smart Risk with Multi-Asset Solutions.



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 material 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 material 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 (SEC); Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt fur Finanzdienstleistungsaufsicht (BaFin); 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]; and Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator; Allianz Global Investors Korea Ltd., licensed by the Korea Financial Services Commission; and Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan.

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Dennis Nacken

Director of Family Offices

Discovering Equity Risk Premiums: Over 200 Years in the Making

Hans-Jörg Naumer | 25/04/2016
Risk premiums in equities

Summary

To uncover long-term investment trends and explore the existence of equity risk premiums, AllianzGI conducted a proprietary study using 215 years of performance data on equities and government bonds. The results may surprise you.

Identifying and harvesting risk premiums is a well-known investment strategy in fixed-income, but too often overlooked is that risk premiums also exist in equity markets. And although some investors may disagree about the number or causes of risk premiums, certain economically significant or persistent investment factors have been identified as reliable sources of risk-adjusted excess returns.

How risk premiums stack up

Structure of long-term risk premiums across select asset classes

Exemplary structure of long-term risk premiums on a range of asset classes

Source: Ibbotson and Siegel, Allianz Global Investors.

Although it's often disclaimed that past performance is not an indication of future results, past performance can, however, uncover certain investment trends. With that in mind we decided to look at the long term, and by that we mean the very long term—going back over 200 years.

What is clear from a review of 10 and 30-year time periods is that only equities, in contrast to bonds, managed to achieve a real positive rate of return in all 30-year periods. While an investor earned a -2% return per annum with bonds in their worst 30-year period, around +3% per annum was the lowest real capital growth that equities achieved. The best 30-year investment period generated an average annual total return of +7.44% for bonds, and approximately +11% for equities. The big takeaway: higher risk was clearly rewarded in the case of equities. Taking purchasing power into account, equities provided a higher degree of security than bonds.

According to the chart shown below, the average risk premium was 3.7% per annum in real terms. The highest risk premium of 11% per annum could be registered from 1943 to 1973. In contrast, in the 30-year bond boom between 1981 and 2011, equities performed 0.4 percentage points weaker than bonds, which gained 7.4% per annum on average. But the lack of a risk premium remains–together with the 30-year period ending 1841–an exception.

When the authors broke down the premium further and analysed key drivers of equity market returns, the historically severe risk premium fluctuations proved to be less surprising. The (nominal) long-term stock market risk premium should be made up of the difference between equity return and real risk-free interest rate, inflation expectations, and the time and credit premiums, variables that did not remain constant over the course of time.


The Rewards of Equity Investing Over the Long Term
US stocks vs. US Treasuries, 1831-2015

Return Differential

Risk premium on US stocks vs. US treasuries (rolling 30-year yields)

Sources: Datastream; Allianz Global Investors; Jeremy Siegel database, 1801-1900; Elroy Dimson, Paul Marsh and Mike Staunton 1900-2009.

Hans-Jörg Naumer, Head of Global Capital Markets Analysis and Thematic Research, who co-authored the study, summarizes: “History seems to confirm the theory: Those who take risks will benefit from a risk premium in the long run.” For a shorter time period from 1970 to 2015, the study broke stock market performance down into return contributions. Over the past 45 years, for example, earnings per share have risen by 6% per annum around the globe and accounted for about two-thirds of total performance. The remaining third was contributed by dividends, which yielded about 3% on average relative to market capitalization.

Naumer notes that the tricky question for investors remains: How to take advantage of risk premiums without suffering from short-term volatility? The answer, apparently, is active investment management, which can help investors better align short-term volatility targets with their long-term return aspirations.


For more information, see Equities—the "new safe option" for portfolios?


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 material 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 material 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 (SEC); Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); 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]; and Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator; Allianz Global Investors Korea Ltd., licensed by the Korea Financial Services Commission; and Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan.

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Hans-Jörg Naumer

Global Head of Capital Markets & Thematic Research
Hans-Jörg Naumer is Global Head of Capital Markets & Thematic Research with Allianz Global Investors which he joined in 2000. The focus of his work is on analysis relating to strategic and tactical allocations, specific investment opportunities and the identification of long-term investment trends. Before joining the firm, he worked for Société Générale, where he became the Head of Research Germany and was part of the French investment bank’s international research team. From his vantage point as an analyst and economist, he observed the establishment of the Economic and Monetary Union and thus ranked among the prime “ECB Watchers”. He started his professional career in the corporate banking division of Deutsche Bank in 1994. Hans-Jörg studied economics at the University of Mannheim, one of the leading universities for economics and business studies in Germany. During his studies, he worked at the Chair for Macroeconomics.
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