Thomas Kabisch is Munich-based chief executive and chief investment officer of MEAG, which manages the €182 billion in assets of German reinsurer Munich Re and its insurance subsidiary Ergo, €164 billion of which is invested in bonds.
He was chosen to set up and run MEAG as CEO in April 1999 and is responsible for mandate management and central functions. As group CIO, he is also in charge of research and the investment process.
Kabisch has also worked at real estate firm Lehndorff Vermögensverwaltung, in the securities and funds division at Vereins-und Westbank and served on the executive board of listed insurer Albingia-Versicherungsgruppe, where he was responsible for the investment, finance and internal audit divisions until 1999.
MEAG also appointed a new Asia CIO in January, Franki Chung, to replace John Koh.
I imagine MEAG's investment portfolio suffered badly, like everyone else's, up to around March last year. Can you tell me what the whole portfolio's returns were in 2008 and 2009, and how they have recovered so far this year?
MEAG's investment result 2009 is equivalent to a return of 4.3% based on the average market value of the portfolio. Including the higher valuation reserves, the total return on investments amounted to a very pleasing 5.7%.
Munich Re's investment policy is reflected in its portfolio of fixed-interest securities and loans (including short-term investments). A good 44% of this portfolio is in government bonds or similarly secure instruments for which public institutions are liable, an area in which the group invested more strongly in 2009. Around 49% of this involves German and US issuers, while 16% of the government bond portfolio relates to Greece, Spain, Italy, Ireland and Portugal.
The 2008 investment result represented a return of 3.4% in relation to the average market value of the portfolio. Including the only slightly negative change in the valuation reserves, the overall return on investments amounted to 2.5%.
We fared well with our investment portfolio in the difficult capital market environment of 2008 and 2009. We will slightly increase the risk profile this year, but not depart fundamentally from our prudent investment policy. We aim to invest more in renewable energies and other new technologies.
Which investments in the portfolio returned the most, and which helped mitigate losses?
2008 and 2009 were tough years for asset managers. Munich Re has a very conservative and well diversified investment portfolio and state-of-the-art investment control and risk management. For these reasons, we didn't suffer that much in the financial crisis.
Of course, our equities did poorly in 2008, but we were able to offset these losses with significant gains on derivatives we used to hedge our equity positions. Our hedge ratio rose from 22% to 52% over the course of 2008.
Furthermore, in an environment of falling interest rates we earned more than €9 billion with fixed-income securities. Our corporate bond portfolio performed remarkably well last year, gaining about 14%. We enlarged this position early in 2009 and started to realise significant gains early this year.
What are your current broad weightings across asset classes, and how does that differ from the historical average?
Having made systematic re-allocations from equities to interest-bearing securities, we generated higher regular interest income. Despite the current low-interest-rate level, regular income from loans and fixed-interest securities rose by €442 million, or 7.4%. Conversely, dividend income from our markedly reduced equity portfolio and regular income from associates fell by €739 million or 76.7%.
Our investment strategy is committed to the principle of sustainability. We aim to invest at least 80% of the market value of our equities and interest-bearing securities in companies that are included in a sustainability index or satisfy generally recognised sustainability criteria.
Why are you in the allocations you are in at present, and how do you see them changing in the coming year? For example, what asset classes, product types, sectors and countries/regions do you feel will perform best in the coming months?
The main part of our allocations is driven by the intention to reflect the liability structure of our clients, but at the same time to deliver a superior performance than would be provided by a purely replicating portfolio.
So, strategically, the backbone of our investments is in bonds, but we use the whole variability of this asset class, which includes much more than government bonds: covered bonds, corporate bonds, inflation-linked bonds, emerging-market bonds, structures and so on.
Additionally, we include a diversified range of risky asset classes from equities to hedge funds, private equity to real estate and renewable energy to commodities.
We think the coming months, and indeed the whole year, won't show clear trends and will therefore offer more tactical opportunities.
At the moment, we see chances in selected government-bond markets in the eurozone outside Germany. There are interesting opportunities in the UK bond market ahead of the elections, but on a hedged basis. We regard East European equities as attractive because they have been lagging behind other emerging markets.
And we rate commodities as an interesting addition to a portfolio, as they benefit from the strong growth in Asia and other emerging markets and offer a partial insurance against political risks in the Middle East.
How much does Asia -- and emerging markets in general -- feature in your portfolio, how has that changed in recent months or years and how will it change going forward?
As mentioned, a lot of our investments are driven by the liabilities of our clients. Asia in particular, but also other emerging markets, are the new growth engine of the world, having taken their lessons from the 1997/1998 crisis and put their economies on a more sustainable path. So, our group is set to grow in these markets, and this means assets and asset-management activities will grow there as well.
Beyond this general trend, Asian economies are very appealing, and we try to exploit opportunities, especially in the areas of risky asset classes like equities, private equity and real estate.
We have been in Asia for a long time already: we have had an asset-management presence in Hong Kong for more than 10 years and we have a 19% share in the Chinese asset manager PAMC, an affiliate of PICC. What we would like to see is a development of more liquid and mature government bond markets, as well as a more flexible exchange-rate regime.
How concerned are you about the debt-related woes of certain European countries (PIGS and the UK, in particular) and how are they affecting your investment strategy/tactics? For example, perhaps you are less attracted to sovereign debt at present, or do you see the relatively high spreads as a buying opportunity?
We think there is a low risk of a near-term default or a euro break-up. Upon the EMU's [European Monetary Union] insistence, Greece has announced measures to bring its future deficits under control. In turn, we assume the EU and individual member states will stand ready to support Greece when push comes to shove, but the main responsibility for efforts remains with Greece.
The high spreads in the different EMU countries offer buying and arbitrage opportunities, but these depend on timing and need close monitoring. Overall, we consider euro government bonds now attractively priced versus spread products, but the euro is likely to suffer from any signs of a softer stance by the EMU.
And how about corporate credit? Can you give me your view on that for the coming months?
The support from the EMU should help defuse Greece's acute financing problems and take them out of the headlines. But in the final assessment, the country's financial issues can only be resolved by a robust economy, strict budgetary discipline and a lasting restructuring of the banking system, which will take some time. We anticipate that after a temporary easing of the discussion, people will return to thinking about the risks of excessive public debt in the EMU again, and for this reason we expect to see some disturbing influences on corporate bonds.
When looking at the corporate bond market, the risk premiums for industrial bonds are quite low compared to those in the financial sector. Hence, industrial bonds would seem susceptible to corrections right now.
Contrastingly, we consider subordinated capital from banks to be attractive from a risk-premium point of view. Regulatory changes should considerably reduce the supply of new issues in this field and contribute to a revival of the market.
Despite the considerably lower risk premiums now than in 2009, corporate bonds continue to make sense as an additional investment. This is because of the low volatility of their returns compared to other asset classes such as equities.
How has the global financial crisis caused you to make permanent changes to your investment strategy/approach?
In fact, the financial crisis has only caused minor changes to our investment approach. The reason for that is that we learned our lessons during the internet bubble at the start of the new millennium and have changed our investment approach and strategy in a way that also passed the test of the present crisis.
We are experts in risk management and only take risks we can afford. We use a range of sophisticated hedging operations and, last but not least, create profiles of the asset structures which fit the estimated liability structures of our clients.
We did and do only invest in products we really understand. We prefer to have a variety of products, which we can hedge, not only in the OTC market but also in regulated markets.
But, of course, there are some new experiences which we have to incorporate: growing counterparty risk, the increasing importance of country risk and the observation that liquidity is fragile and can fully disappear in some markets during a crisis.