Allianz Global Investors’ RiskMonitor survey reveals that perception of financial risks has risen dramatically

• Market volatility ranks as biggest risk; sovereign debt and falling equity markets come second and third.
• Over 60% of respondents consider tail risk a major concern.
• Few deem traditional risk approaches appropriate to cope with challenges ahead.
• Dynamic risk management can prevent investors from unexpected negative outcomes.

Frankfurt, November 28th, 2011. Institutional investors in Europe view market volatility as their biggest perceived risk in the next 12 months according to the latest biannual RiskMonitor survey from Allianz Global Investors, followed by sovereign debt and falling equity markets. Interest rate risks were to the fore of investors’ minds six months ago, whilst volatility ranked fourth. The share of respondents seeing volatility as major risk¹ has risen by 16 percentage points to 89% since the last survey was conducted.

The share of respondents worried about sovereign debt and further sharp drops in equity markets has increased similarly. Sovereign debt is now perceived as a huge risk by more than a third of respondents, more than any other risk category. Thomas Wiesemann, Chief Market Officer of AllianzGI in Europe, comments: “Nearly all indicators show a rising concern regarding capital market risks which is subsumed by the high concern on volatility. But remaining in the ‘risk off’ mode for longer will be dangerous for investors since the current low interest rate environment is generating insufficient returns to match investors’ liabilities, sometimes even negative real returns. If investors want to navigate these volatile markets with a limited risk budget and without giving up market upside potential, dynamic risk management strategies have become a necessity.” Current interest rate levels are perceived as a major risk by 63% of the respondents, more than either rising or falling rates. On average, falling rates are perceived as a major risk by 42% and rising rates by 33% of the respondents.

Greater probability of tail events

The results of the survey indicate that more investors are seeing the probability of tail events rising. Nearly 63% of respondents now view tail risk as a major concern, compared to 48% six months ago. More than 6% view it as their biggest risk in the current environment. Wiesemann comments: “Not only are investors facing many types of higher risks, they are now uneasy about the ‘unknowns’ as rising interrelated risks could become systemic in nature as markets continue to act erratically.” The marked increase of perceived counterparty risk (“major risk”: 57% from 31%) and liquidity risk (“major risk”: 45% from 22%) both considered rather uncritical in normal times seem to support this interpretation.

Strong confidence in the euro but high concerns on sovereign debt

Though 80% of the respondents in Europe think that the euro will survive under the current circumstances, the sovereign debt risk is being taken very seriously amongst the survey participants. Euro confidence and sovereign debt concerns seem to be quite correlated if the results are being viewed from a national perspective. Respondents in Italy, France and Germany showed the highest confidence in the single currency (more than 90%), but were also the most concerned about sovereign debt with nearly 64% in France, 57% in Italy and 43% in Germany viewing it as a “huge risk”. Asked about the most likely change with regard to the euro 42% of the respondents mentioned strengthened stability mechanisms, 19% the introduction of euro bonds and 11% the establishment of a joint fiscal regime. A quarter of the respondents view a split of the euro zone most likely to happen.

Rethinking risk management

The most frequently used method to mitigate risk is diversification with 40% of respondents using it. It is followed by risk monitoring and duration management (both around 15%) and dynamic asset allocation (12%). Survey participants were also asked which risk approach they think is best suited to cope with current and future challenges. Interestingly, only 8% said that the traditional approach of managing risk by asset class following the assumption of a risk free asset class was best suited. Just over a third (36%) view managing asset liability risk as most appropriate, followed by breaking risk into categories rather than asset classes (29%) and managing risk by loss tolerance or expected loss (25%). Reinhold Hafner, Chief Executive Officer of risklab, a subsidiary of AllianzGI, comments: “These results show how far institutional investors have already developed their strategic risk set up but the degree of its operational integration still differs. Investors have to shift from a backward-looking static framework based on a normal distribution to a forward-looking dynamic structure that explicitly accounts for empirical facts, such as fat tails and correlation breakdowns. Dynamic risk management strategies that go beyond pure diversification have passed the test during the financial crisis and will become more important.”

Rising unease on regulatory and governance issues

As in the previous survey, concerns on regulation and governance rank much lower than financial risks. However overall concern regarding stricter regulation (seen as a major risk by more than a third of the respondents) and the limitations of own risk management capabilities has risen too. Thomas Wiesemann concludes: “The current market environment puts a lot of investors under stress and urges them to continuously challenge their individual approaches. Especially in these times clients see that asset managers’ solutions, advice and services can add value in achieving their targets. In order to better meet the clients’ need for integrated solutions, Allianz Global Investors has decided to bring its expertise and strong track record in risk management, pensions and fiduciary management closer together and bundle its strong solutions building capability into a dedicated global function.” Thomas Wiesemann will head the Global Solutions function and Reinhold Hafner will assume its Chief Investment Officer role effective 1 January 2012.

About the AllianzGI RiskMonitor survey

The second AllianzGI RiskMonitor survey was conducted from 5 September to 3 October 2011 in eleven European countries (Austria, Denmark, Finland, France, Germany, Italy, Netherlands, Norway, Sweden, Switzerland, and the UK). 140 institutional investors (predominantly pension funds) managing and advising on assets totalling EUR 909 bn participated in the survey. By the size of its sample the survey does not claim to be representative, though it carries enough weight to capture the most important trends among institutional investors in Europe.
The full report can be downloaded here.

For further information please contact:

Stefan Lutz, Telephone +49 69 263-14276,
Email: stefan.lutz@allianzgi.de

Marc Savani, Telephone +49 69 263-14206,
Email: marc.savani@allianzgi.de

About Allianz Global Investors

Allianz Global Investors, the asset management subsidiary of Allianz SE, has circa EUR 1,500bn of assets under management for its clients worldwide (as of 30/06/2011). Its investment managers offer their own distinctive investment philosophy, and provide clients with a comprehensive and constantly evolving range of products and services. Its 4,900 employees around the globe, including more than 1,000 investment professionals, are committed to helping clients achieve their goals by combining global expertise and local market knowledge with innovative solutions and world-class professional service.