In a two-part series Allianz's CIO, Carsten Quitter, speaks to Insurance Asset Risk some three years after his predecessor Andres Gruber told of his challenges. In part two, Quitter talks about the latest themes affecting his role as CIO: technology, ESG and the relationship with Allianz's asset managers. By Sarfraz Thind
Allianz's chief investment officer (CIO) Carsten Quitter has his finger buried deep in the market pulse—and he needs it to be. The last three years have seen new themes crop up onto the CIO agenda. No less so than Environmental, Social, Governance (ESG), the current hot topic in the markets, and something that Allianz is very much concerned with.
In May, the company announced its divestment from coal by 2040.
It shows a serious intent, according to Quitter. "It would be easy to say we've got this amount in ESG funds and its green—that would not do us any good. We really mean it. It will be a lot of work to go there but we are committed to support sustainability-oriented investments."
The ESG office is headed by Allianz board member Günther Thallinger. There is no "text book" for this kind of activity yet so Quitter says the company has to find its way while working through it. But there is a rough model to follow. To begin with Allianz assigns ESG scores across its portfolio assets. It will take action on the lowest 10%--however, the idea is not to kill but to engage.
"We will say to companies—'you are ranking low so can we talk. We want to stay invested but what are your plans for the future?'"
Having a conversation with companies is necessary to gain deeper understanding of their practises—both for Allianz and the company itself. Of course, the dialogue scenario does not always work—as is the case with coal.
"Sometimes companies we are engaging with say let's see how we can change," says Quitter. "But with coal it's a pretty binary thing. And it's also about performance. We don't think coal oriented investment will outperform others on average."
The other big trend in the market is the growth of technology influencing all aspects of insurance and investing. Quitter—being a computer scientist by education—admits he could spend hours talking on the subject. And Allianz has been working through a plethora of digital initiatives to see how it can benefit from new forms of technology—from hiring and training its employees to become more comfortable with the latest technologies to running new types of technological programmes in diverse things like blockchain and artificial intelligence (AI).
The latter is of course a subject of close consideration for the modern investor. For Allianz, one of the clearest sources of potential for AI and machine learning (ML) application is in asset and liability management (ALM), which in being a heavy, data-loaded computational activity seems ripe for more robust and faster technological processes.
"ALM in life insurance means having models which project cashflows of clients under various market scenarios—the investment arm has to come up with asset allocation strategies which can match the cashflows of these liabilities," says Quitter.
However cashflow projections take time and computer power to run. While machine learning-based algorithms don't get the exact same result as cashflow matching, they are close enough and run much faster, Quitter explains. "Then running these 500 or 2000 times instead of 10 or 20 as we do now, can allow a company to get a broader set of choices in making the allocation decision."
Allianz is currently working on a project dubbed 'ALM approximation with ML algorithms', part of a bigger project 'Strategic Asset Allocation (SAA) optimisation' which looks at investigating ML in the investment process. While there isn't an AI or robot which can do the whole ALM process at the press of a button, there is the prospect of making analysis faster and more robust which will help to draw better conclusions across a broader set of analysis.
"Using our proxy machine learning algorithm we have reduced the run time for one scenario (asset allocation strategy) from 1h to 5 sec," says Quitter.
The company has also been looking into using ML for investing. For Quitter, this remains a way off at present.
"It is too early to say if there is real value in this kind of quant trading," he says. "For sure in niches there are people who have found arbitrage opportunities through heavy data analysis, but you can't apply this on a $660bn book."
In any case, Quitter and co are not the actual traders of bonds and stocks at Allianz—that concern is passed onto the asset managers—so it is not something he has to worry about too much.
Quitter works with Allianz Global Investors (AGI) and Pimco which sit cosily under the Allianz umbrella.
In recent years both AGI and Pimco have seen their fortunes flourish. The latter is coming out of a three-year trough after the departure of previous head Bill Gross saw clients pull money out at a rapid rate of knots. With the new CIO Daniel Ivascyn's success as a star trader, the company has seen a sudden surge of inflows from around the world matching its already strong performance.
Quitter says it is nice to see the success of both fund managers from a corporate perspective. And having them under the Allianz umbrella offers him the key advantage of "family pricing".
"Pimco and AGI are natural asset manager sources for us—as well as being highly professional, they are part of the family, so we have a great relationship with arm's length market pricing which—on a huge asset basis—is the best you can get."
Although he won't go into details on fees, "family pricing" is clearly useful for Allianz's core assets, the traditional government and corporate fixed income portfolio. These more liquid assets are not particularly alpha generating because of the restraints the company faces from an ALM perspective —assets are chosen to match liabilities and outperformance by asset selection is less of a concern—so low fees can be the difference in saving a few basis points.
It is in the more specialist segments where outperformance driven by managerial skill really counts. In this case external asset managers can be a better pick than AGI or Pimco.
"Pimco and AGI are great but in some special areas there are others who are sometimes even better so we select them," he says. "Everyone is allowed to play."
The company has also been known to create its own specialist asset managers to tap into diverse markets. This is helped by Allianz's size which allows it to experiment with internal asset manager divisions.
So how much further can the company grow? Quitter says Allianz is expecting further increase in assets—but not much.
"There will be growth in life—will it be double digit: no."
Even if there were growth, it would not impact the terms of its asset allocation. If there is more allocation to be done that will be passed onto its asset manager.
"It's the asset managers that do the name selection," he says. "The process of asset manager management is that we select asset managers and they do the job—we monitor and review it and the circle is closed. If our portfolio grows by 10% you just increase the mandate by 10%."
Nearly six months into the new job, Quitter seems well on top of things. His work, however, is not done. One key project is to enhance the company's global network. Allianz Investment Management (AIM) is seen as the poster child of a globally co-operative business by its chief executive Oliver Bäte but Quitter is looking to push things further.
"We are in a good situation but we want a bit more," he says. "We really want to see us as open network and for cross entities to work together. This is a subtle and interesting change in culture to benefit more from our global set up."
The company is setting up global expert teams on certain topics—stretching from asset class to ALM function or monitoring—with people in different countries or regions coming together to work on these.
Quitter says he doesn't need the group to come with a new project and everyone to implement it—the new structure is designed to allow people to organise themselves and discuss issues within their own company division, whether this is through taking secondments in other countries or using Allianz's intranet.
It is a self-help approach that seems to be working at the company and very much a hallmark of the new CIO whose proactive and global disposition looks likely to lead the German institution to further success.
Part one is available here: Allianz's CIO talks: "I didn't come here to radically change things."