(September 26, 2013) – Financial repression is forcing pension funds to look at smarter ways of measuring risk in order to take advantage of it, according to Allianz Global Investors.
Arun Ratra, head of global solutions at the fund manager, told reporters that pension funds were starting to look at asset liability management (ALM) in more depth as the depressed interest rate environment forced them to seek out higher yields.
Speaking ahead of the Allianz-Oxford Pensions Conference, he said: “The first step to take is to really understand what this financial repression environment means for pension funds, for funding levels, and how it affects the corporate liabilities.
“To just de-risk now is not the smartest thing to do. You should start by looking at your balance sheet more holistically. Now, we need to revisit ALM modelling, devising a more robust asset allocation, and creating a platform for performance.”
This, he continued, means looking at newer asset classes and strategies, paying more attention to portfolio construction, and making better use of the risk budget available.
“It’s about a dynamic risk management regime which takes the pro-cyclical profits and locks them in, while taking positions on anti-cyclical risks on the portfolio.”
Financial repression is the name given to policy decisions implemented by governments and central banks to artificially depress interest rates in order to encourage growth.
The effects are being seen across the world—as an example, Germany has seen its real interest rates falling into negative territory for the first time ever.
The knock-on results are depressed bond yields and increased liabilities. Stakeholders argue this negatively impacts on corporates, which struggle to keep on top of their pension liabilities, discouraging spending on growth.
Institutional investing during a period such as this is challenging, but it is forcing trustees and CIOs to consider dynamic asset allocation strategies in order to take advantage of the risk premia on offer, according to Allianz Global Investors.
The fund manager laid out a four-point plan to achieve what it calls “Smart Risk”: increasing allocation to risky assets; adding uncorrelated sources of sustainable alpha; increasing diversification and; dynamically managing risk to reduce losses while taking advantage of upside potential.
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