Allianz Global Investors’ “Best Styles” equities group has existed for 20 years, but has been seeing heightened institutional investor attention recently around its multi-factor management strategy for clients ranging from mega pension funds to insurance companies. The team differentiates itself from other managers with comprehensive risk management that it claims produces stable returns, rather than outperformance based on higher risk budgets.
A core-equity investor’s portfolio needs to be disciplined, with market-mirroring beta and risk to produce consistent excess returns over the benchmark, Rohit Ramesh, portfolio manager at Allianz, told IA. “We bundle this [ability] together at a reasonably attractive fee (Rohit declined to disclose the fee amount) in line with what we deliver—our target return is always to give [the client] a return that is 1% to 2% over the market,” he added.
Allianz divides risk premia investing into two-factor buckets, Ramesh said. “The first bucket is rewarding styles that generate excess return in a stable fashion and the second bucket is short-term risk factors that are unrewarding, with possible unintended consequences. Our job is to harvest the first in a stable fashion, whilst controlling the second. We believe that no active management equals no excess returns. For example, a lot of pension funds fall short of return targets 7% per year, in many cases due to their passive equity portfolios.”
The possible unintended consequences of passive management could include the economic shock of a pending stock market downturn and currency risk, Ramesh said. “This is why a multi-factor fund is necessary, when in the good times you can reap the stable benefits of broad factor outperformance and in the bad times there is no drawdown associated with a particular factor,” he added.
An intense discounting effect took place after the 2008 global financial crisis (GFC), Ramesh explained. “There was a fire sale of assets during this period, which led to a discounting of many asset classes—holding physical assets turns into losses anytime the market is in a downward direction and there are more sellers than buyers,” he said. “During the GFC, there were huge losses by quant funds, because they all owned the same assets—when [funds] are passively managed, there is no measure of whether [a portfolio] is diversified or not. We’re trying to close that loop.”
“Running for the middle” to neutralize risk is a strategy that has worked for Allianz, Ramesh said. “We try to create certain barbells in our portfolio, with weights loaded on two sides—if [you] hold onto certain stocks while managing risk well, we’ll make the best returns and stay safe in the middle,” Ramesh said. “With proper risk management of a diversified product, the investor can capitalize when the market favors valuation and even when it favors trend following—thus creating a more stable return path [when employing this strategy].”
A balance must be achieved in any portfolio between value and trend following, Ramesh said. “Core equity products cannot be loaded up with too much risk and beta,” he continued. “And sometimes value does not work—it’s easier said than done. One style that works better in certain market phases is a tactical up and down, taking advantage of the governmental and economic situation, while being careful not to blow up risk,” Ramesh added. “More institutions are looking at multi-factor strategies, over single-factor, passive-active strategies. Asset owners still respect that there is value to be had in active management, and are not just focused on fees.”