Allianz SE Chief Executive Officer Oliver Baete plans to push deeper into alternative asset classes such as real estate as its giant bond manager Pacific Investment Management Co. struggles to attract new money.
While flows at Pimco have stabilized, they’re “still shaky” as investors assess the outlook for interest rates, Baete said. And even a peak in borrowing costs doesn’t mean that money will automatically return to active managers such as Pimco, he said in a wide-ranging interview that also touched on lessons learned from Allianz’s hedge fund debacle and his discussions with the Department of Justice over the matter.
“Everyone assumes that bond flows have to come back once we hit a peak in interest rates,” Baete said from his office in Munich. “But the question is how much will go into passive strategies, and what goes into active strategies. We have to make sure that we remain attractive.”
Allianz has traditionally relied on its asset managers, which also include Allianz Global Investors, to diversify away from insurance and offset earnings weakness in other segments. But a hedge fund blowup in the US, which cost the company $6 billion, and a string of outflows at Pimco following the global bond selloff have underscored the risks and challenges of that business.
While Pimco managed to attract €14 billion in the first quarter, ending a €75 billion streak of outflows, investor sentiment is still so skittish that the bond giant is seeing fluctuations from day to day, Baete said.
“We are not yet in a period of high growth again. That will take some time”, he said, adding that he does expect Pimco to post some inflows for the full year.
Shares of Allianz rose 1.4% at 1:31 p.m. in Frankfurt trading, bringing gains this year to 6.5%.
In the role for eight years, Baete has overseen Pimco’s rebound from the chaos of co-founder Bill Gross’s departure, and he steered Allianz through the unprecedented challenges of the Covid-19 pandemic. The insurer, which acquired Pimco in 2000, has been a staunch defender of active fund management through it all, even as investors flocked to cheaper passive funds.
With public markets becoming increasingly efficient, the CEO acknowledged that making excess returns in traditional bonds has become more challenging. “There’s not much alpha left in a traditional Treasury,” he said, referring to the ability of an investment strategy to beat the market.
The situation is different in alternative assets, where fees for managers also tend to be higher and client assets are stickier, said Baete. He singled out real estate and private credit as particular growth areas for the firm, as panicked selling in some parts of the real estate market and the pull-back of banks from lending create opportunities.
“Right now, everyone is selling all kinds of alternative assets, including real estate,” he said. “In the US, there is panic in some real estate markets. That is typically an indication that you will soon be able to buy cheap again.”
“For the moment, we’re standing on the sidelines, while preparing to snap up some bargains down the road,” Baete said.
Allianz combined its real estate arm Allianz Real Estate with Pimco’s real estate business in 2020. The move created a platform that now invests about $195 billion in real estate equity and debt on behalf of Allianz’s insurance units and outside clients. Baete said that Allianz also needs to expand its private credit offerings.
“Direct lending is not going away,” he said. “There has always been the hypothesis that direct leding would disappear with rising interest rates. The willingness by banks to lend money remains limited in some case, especially after the recent liquidity issues.”
Unlike Pimco, which at €1.3 trillion in third-party assets is one of the world’s premier bond managers, AGI has long been seen as subscale. Baete said Allianz received frequent calls from parties suggesting AGI deals, after the implosion of the group of hedge funds the firm ran in the US raised questions about its future.
Baete had made settling the conflict with clients and authorities in the US a priority and last year agreed to a $6 billion payment to put the matter to rest. As part of the deal, AGI’s US operations were banned from some fund services in the country, and Allianz transferred AGI’s US assets to Voya Investment Management.
Baete in the interview called the discussions with the DoJ and Voya “among the most consequential negotiations” of his life. The hedge fund debacle has led to a “cultural change” at the company, he said.
“We had criminals, not weak control systems,” Baete said. “I trust my employees, but I want to make sure that the trust is justified. Trust is good, control is better.” Allianz also needs to be quicker to implement regulatory requirements when they change, he said.
Despite the hefty price Allianz ended up paying, Baete reiterated his backing for AGI, which he says has a leading position in Germany, alongside Deutsche Bank AG’s asset manager DWS Group.
“It is absolute nonsense that you cannot survive on assets under €1 trillion,” he said. “It just comes down to having a strong profitability structure.”
Baete took the helm at Allianz in 2015, at a time when Pimco was bleeding assets following the departure of co-founder Bill Gross. While the bond manager rebounded under Baete’s watch, the CEO has struggled to find bigger takeover targets, focusing instead on smaller deals and returning cash to investors through dividends and over €11 billion euros in share buybacks since February 2017.
“Larger M&A transactions are less likely to be successful,” Baete said. “And there also need to be interesting bigger takeover targets. I didn’t see any.”
This article was provided by Bloomberg News.