Allianz finds pension demand for fixed income risk control

Europe’s pension funds historically often engaged providers of portfolio overlay structures to limit losses or volatility of equity and other ‘risk’ holdings, however soaring prices of core debt during the Eurozone crisis has also seen them seek help with the risk now also evident in such fixed income holdings.

Pensions have arguably bought core debt holdings during the crisis for its ‘safe haven’ status, not yields. Yield rates on 10-year Bunds have exceeded 2% for only four trading days this year, and similarly dreary yield charts emerge for gilts and Treasuries.

Trustees recognise the price risk they now face holding such instruments.

If 10-year Bunds revert to their average yield over the past 50 years, holders face capital losses of nearly 30%, according to EM specialists Ashmore. For Treasuries, the equivalent loss would be 34%.

Consequently, some allocators are now enlisting overlay specialists such as the Multi Asset team at Allianz Global Investors.

Patrick Bastian, director and head of product specialists at AGI’s Multi Asset unit in Frankfurt, says: “Looking into the future you can expect there will not be such attractive bond markets as we have seen in the past. That means even in 10-year bonds, there are significant drawdown risks given rising equity markets, and to manage this you need this kind of service.”

AGI’s overlay service can be applied to all strategic asset allocations, consisting of liquid asset classes, to limit client portfolio losses in falling markets and gain attractive participation in market upside.

Bastian notes none of more than 800 mandate protection levels the Multi Assethis team has managed in protection mandates since the late 1990s has ever been breached, meaning these mandates have not exceeded the maximum loss the client will allow.

“It is all about how you calculate and forecast the maximum drawdown risks. We use extreme value distributions to calculate losses and also, within our protection team, we have real-time information about the development of the client’s risk budget. The biggest risk is in underestimating the downside risks in extreme market events.”


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