Allianz is pressing on with its plan to raise its alternatives allocation to around a fifth of its global portfolio, amid concerns that the global economy is probably close to the top of its cycle.

In an interview with AsianInvestor earlier this month, chief investment officer Carsten Quitter outlined the German insurance giant's increasingly guarded outlook and why it is looking to invest more in stable but illiquid income-producing assets.

“We think we are in the late cycle of the global market, the end of the credit cycle," he told AsianInvestor. "So we see in our mid-term credit forecast that the world economy is peaking and could obviously slow down a bit.”

While the US economy was now being supported by the America-First politics of President Donald Trump, that probably cannot be relied upon further down the line, he added.
 
For the next year to 18 months “we don’t see a US recession as our main scenario”, but one might be coming in three to five years following the current “'sugar high' or 'straw fire'”, Quitter said.
 
Allianz is one of many asset owners continuing to build out their alternatives allocation in the face of a changing big picture and after years of sub-par yields. 

“To deal with the low-interest-rate environment, our main focus is on alternative assets,” he said, mirroring a similar approach by other large insurers such as US-based MetLife that still appears to apply even as rates edge higher in the UK, US and elsewhere.

Allianz has around €111 billion ($127 billion) of its €660 billion in alternatives, including real assets or private debt and equity, and expects to reach €140 billion in less than five years, said Quitter, who is based at the company’s Munich headquarters.

At the last count, more than half (some €60 billion) of Allianz's alternatives portfolio was in debt assets, with €35 billion in real estate and €15 billion in infrastructure, renewables and private equity. 

Overall, property accounts for €56 billion of Allianz’s alternative assets, but the other asset classes are “catching up”, Quitter added.

Carsten Quitter

Asked where it will be adding exposure, he said allocations would depend on the attractiveness of different assets. “In some areas the yield has come down so much that it doesn’t make sense to buy private or illiquid assets any more; you may as well buy public ones.”

For example, core renewable energy assets in Europe are becoming less attractive, given the weight of money chasing them, Quitter noted, reflecting concerns being expressed by many investors.

PROPERTY PLANS

In addition, Allianz is looking to further diversify its property portfolio after adopting a more systematic, top-down global real estate strategy last year to help identify target investments, including assets in Asia and some emerging markets, he said.

The insurer largely buys real estate and infrastructure directly. It has its own property investment arm, Allianz Real Estate, which aims to double its allocation to Asia to 10% in the next three to four years, the division's Asia-Pacific CEO, Rushabh Desai, told AsianInvestor in March.

The insurer allocates to private equity entirely via funds, and also has some private debt, but no investment in hedge funds.

For all that Allianz’s global portfolio remains fairly conservative, with 87% in fixed income and 9% equities as of end-2017 (alternatives are spread across the two categories). Indeed, its debt assets are 94% investment-grade.

Allianz is one of many asset owners continuing to build out their alternatives allocation in the face of the changing big picture.

Take the aforementioned MetLife, for instance.

“There are areas where there could be pockets of volatility [in the coming few years] because of trade tensions and potential breakouts of inflation, and just a generally changed environment of higher rates," its Asia CIO, Chuck Scully, has previously told AsianInvestor. “That really is pushing us towards private asset categories, and that would be privately placed corporate bonds and commercial mortgages.” 

Rival  US insurer AIG’s CIO for international markets, Guillermo Donadini, went so far as to say in April that real interest rates could remain negative for another 20 years, so investors should act accordingly.

Moving into private markets and other new types of investments, such as factor strategies, are therefore necessary, he said, noting that AIG had put in place a more sophisticated asset allocation framework in response to the new environment.