Update Client Magazine for Institutional
Investors

Understand Risks - Generate Performance - 60 Years of Experience

Update Magazine III/2013 - Allianz Global Investors - Fixed Income Strategies


Long Tradition and Selective Innovation Allianz Global Investors (AllianzGI) possesses 60 years of experience in managing fixed income portfolios, and shares a common heritage with our parent Allianz, namely taking and managing risk in a smart way in order to achieve sound results. Part of our deeprooted tradition in fixed income is the commitment to thoroughly understand client needs, and strictly observe their risk constraints.
The strengths of AGI lie

  1. in the emphasis on risk management,
  2. in specialised resources with a regional focus, and
  3. in selective innovation enabling us to benefit from new market trends. The ultimate purpose of our efforts is to continuously fulfill and exceed our clients’ expectations.

Strongly rooted in Europe, our fixed income capabilities have expanded over multiple market cycles since 1950, and enabled AllianzGI to become one of the leading fixed income managers in Europe, with EUR 157 billion fixed income assets under management, and 48 portfolio managers (Chart 01). Our clients can choose from three management approaches, each with distinct characteristics:

  1. Advanced Fixed Income: tailored solutions engineered for optimal risk-adjusted returns.
  2. Corporate Credit: based on proprietary fundamental credit analysis.
  3. Conviction Fixed Income: judgmental and flexible strategy in terms of duration, country and sector allocation that exploits fundamental global economic macro trends.

Common characteristics of our strategies

Both the Corporate Credit and Conviction Fixed Income approaches benefit from high-conviction strategies which result from regular Executive Council portfolio strategy meetings. On a weekly basis, portfolio managers and analysts present their ideas to each other and to the Executive Council. The best ideas are then selected and implemented into the portfolios.

Another feature common to our approaches is how risk is evaluated and monitored in every step of portfolio construction. Firstly, an indepth analysis is conducted on market risk, liquidity risk, issuer risk and counterparty risk. Secondly, continuous plausibility checks are carried out, and full transparency of risk metrics – as well as thorough due diligence – are ensured during the management of the portfolios. Finally, independent risk controls are performed by two separate entities – IDS GmbH and PRC (Portfolio Risk Controlling). These include stress tests, auditing, and monitoring of counterparty and liquidity risks on an ongoing basis.

Distinct fixed income solutions

The philosophies, investment processes and product features of ourthree strategies are as diverse as our investors’ needs are distinct.

Whereas Advanced Fixed Income is an engineered, riskconstrained and systematic approach, and Corporate Credit is primarily a bottom-up process, Conviction Fixed Income differs in that it is a purely judgmental global top-down macro trend approach. The following pages provide deeper information about the particular features of these three strategies, their respective investment processes, and the responsible teams.

“Advanced Analytics blends traditional fundamental research and powerful quantitative tools in order to reduce the complexity of the investment universe.”

Advanced fixed Income

Advanced Fixed Income is a flexible investment process engineered for global risk-constrained strategies (Chart 02). It is characterised by a disciplined active management approach that seeks to systematically exploit market inefficiencies and asymmetries to generate long-term added value for its investors.

The Advanced Fixed Income team comprises 13 highly experienced portfolio managers and a dedicated product specialist. The team is headed by Maxence Mormède, Head of Fixed Income Germany and CIO Advanced Fixed Income, who has 14 years’ experience in the industry and in our firm.

The strategy aims to achieve a sustainable outperformance over the investor’s benchmark. To this end selective active positions are taken which are based on the results of our proprietary research.

Comprehensive research efforts

The research framework used for this strategy is called Advanced Analytics. It is structured to enable both a broad market coverage and deep insights. The analysis covers most fixed income sectors globally, including sovereign, covered and corporate debt. It blends traditional fundamental research and powerful quantitative tools in order to reduce the complexity of the investment universe. We cover approximately 60 global sovereign issuers on a regular basis, and examine their creditworthiness thoroughly to assess their actual ability and willingness to repay debt. Our covered bonds analytics assess 220 collateral pools, 60 issuers and more than 20 different legal frameworks. 430 non-financial issuers as well as 180 financial issuers are screened in the search for additional opportunities in the corporate bond sector. When it comes to the evaluation of credit quality, our focus is on avoiding downgrades, and not only defaults. We apply these and several other analytics along the whole portfolio management process, and use periodic team meetings to define and review the strategic and the tactical positioning, from the allocation down to the bond selection.

Strong emphasis on risk control

Portfolio construction is carried out using a systematic optimisation process, ensuring that risk guidelines are strictly adhered to. Permanent risk monitoring and controlling is an essential part of the portfolio management process. In particular interest rate, liquidity, country and issuer risks are closely observed, and appropriate action is taken if necessary. All things considered, Advanced Fixed Income is our solution for clients striving for superior risk-adjusted performance in a predefined fixed income market segment.

Corporate Credit

Our Corporate Credit Strategies are characterised by an active management approach and fundamental bottom-up security selection (Chart 03). The focus is on a detailed analysis of the credit quality of the issuers in our eligible bond universe in Europe. In this context, we rely solely on a proprietary model for credit analysis. A tactical overlay enables us to adjust credit and sector exposure in anticipation of major changes in the underlying trends in credit markets. This requires a particularly deep understanding of market dynamics, which our seasoned credit team has gained over several market cycles. The Credit team consists of five portfolio managers and six dedicated credit analysts. Also contributing to credit research (in terms of sector coverage) are portfolio managers from Advanced Fixed Income. The team members have an average 14 years of industry experience. Team head Alexandre Caminade, CIO Credit Europe, has 21 years of experience managing European credit portfolios, and is lead portfolio manager of our high yield strategy.

The investment process begins with a thorough fundamental analysis of individual issuers to assess their actual credit quality, and avoid downgrades and defaults. Subsequently, a relative value analysis of the respective bonds is performed to ensure we are adequately paid for the risk taken.


“The focus is on a detailed analysis of the credit quality of the issuers.”

Credit quality, sector and duration exposure according to client needs

Our Corporate Credit Strategy covers the entire quality spectrum from investment grade (IG) to high yield (HY), including convertible bonds. The strategy can be made available through tailor-made portfolios, taking into account individual constraints regarding exposure to IG/HY, sectors and duration. Depending on client needs, target maturity funds or portfolios with a predefined yield target and average/minimum rating are also available.

For clients seeking attractive real return in the current low yield environment, we offer pure high yield strategies as well as a longstanding convertible bond strategy which enables fixed income investors to benefit from a favourable stock market environment with limited downside risk. Last but not least, funds employing SRI and ESG filters are available through existing mutual funds or tailor-made accounts.

“A key feature of the approach is the highly active management of duration, country allocation, and credit spread exposure.”

Our Corporate Credit Strategy offers clients a broad array of solutions to meet their investment needs and risk requirements through an active fundamentally-orientated management approach. Our expertise in European Credit is well recognized, and is reflected by significant inflows from institutional European clients: currently, the credit team manages about EUR 16 billion “buy and monitor” insurance-related portfolios, and EUR 4 billion in active credit strategies, including mutual funds, segregated accounts, and credit buckets in balanced portfolios.

Conviction Fixed Income

Our Conviction Fixed Income Strategies follow an investment approach that is judgmental in nature and focuses on exploiting fundamental macro-economic trends in a flexible manner (Chart 04). The objective is to identify potential turning points in the markets in advance, and implement suitable core and satellite strategies in order to generate solid alpha under all market conditions. A key feature of the approach is the highly active management of duration, country allocation, and credit spread exposure. By means of a dynamic sector allocation the strategy seeks exposure to the best-performing fixed income sectors in the given stage of the market cycle.

The Conviction Fixed Income team consists of 12 seasoned portfolio managers and two product specialists. The average industry experience of the team members is 14 years. Team head Mauro Vittorangeli, CIO of Conviction Fixed Income Strategies, has been managing European and Global Fixed Income Portfolios at AllianzGI for 20 years.

The investment process starts with weekly meetings of portfolio managers and analysts with the Executive Council, where macroeconomic issues and ideas for active positions are discussed. Based on the assessment of global growth trends, inflation and central bank policies, ideas for country allocation, duration and yield curve positioning, as well as exposure to spread sectors and currencies, are presented. The Executive Council considers these inputs and establishes high-conviction strategies which are then implemented in all portfolios managed according to the Conviction Fixed Income approach.

Individual combinations of core and satellite strategies available

The core universe includes traditional instruments such as European government and agency bonds, covered bonds and investment-grade corporate bonds. Depending on the leeway of the individual portfolio, satellite strategies are added with the aim of further diversification and extra yield. Instruments eligible for such satellite strategies are high yield bonds, emerging market and convertible bonds, as well as currencies from G-10 countries. Portfolios with various combinations of these instruments and different duration bandwidths can be tailor-made to meet individual client constraints or yield targets.

Thus, our Conviction Fixed Income Strategies include liquidity management solutions for corporate treasurers as well as classical medium-term benchmark strategies suitable for many institutional investors. Regarding the longer end of the yield curve, inflationlinked as well as liability-driven strategies are available which meet the requirements of pension funds and insurance companies. Last, but not least, our Flexible Bond Strategy provides investors with the opportunity to benefit from a demanding interest rate environment through either negative or very long portfolio durations.

All in all, our Conviction Fixed Income Strategies offer clients a wide array of solutions to meet their investment needs through a fundamentally-based judgmental approach, resulting in promising active positions taken through the incorporation of highconviction strategies.

SUMMARY

Our three approaches above offer investors a wide spectrum of choice (Charts 05–07). Whether an engineered risk-constrained systematic approach with Advanced Fixed Income, or a yieldorientated approach with the bottom-up credit analysis of Corporate Credit Strategies, or a diversified European strategy that is judgmental and exploits fundamental global economic macro trends, we offer solutions which have one important thing in common – taking risk in a smart and prudent way.

Which of our three approaches benefits clients most depends on a number of decisive factors which need to be discussed in advance. These include potential tracking error targets, risk budgeting constraints, intended risk profiles, return targets and preferred fixed income sectors. Taking these considerations into account enables us to decide whether the best solution may be provided by an existing fund or by a tailor-made solution. In either case, clients benefit from a long-standing and widely recognised expertise that has evolved during 60 years of successful fixed income management.