Investment strategies in the low interest rate environment

16 October 2014

On 8 October, Maximilian Zimmerer, member of the Management Board of Allianz SE, Investments, gave a lecture at the CFS Colloquium Series “Risk-taking in the European Economy: Financial Institutions and Markets.” He explained which challenges investors have to face in the currently low interest rate environment and which investment strategies the Allianz Group pursues.

The low interest rates, Zimmerer said, are challenging private investors for example with regard to old-age provision. For instance, if a person invests money for the duration of 30 years to get an amount of 100,000 euro for his retirement, the necessary seed capital would depend heavily on the interest rate. If interest rates are on average 7%, a seed capital of 13,137 euro would be enough, while 55,207 euro are needed, if interest rates are only at 2%. Thus, the saving rate had to increase tremendously to ensure old-age provision, Zimmerer pointed out.

The Allianz Group invests most of its capital (89%) in fixed-interest investments, Zimmerer explained. Prior to the introduction of Solvency II, a reform of the insurance supervision law in Europe, the share was significantly lower. According to Zimmerer, insurance companies today choose less risky investments as a consequence of the introduction of Solvency II. Also, the investment periods of life insurances have increased since Solvency II.

Zimmerer criticized that not all regulations of Solvency II were effective. For example, EU government bonds do not need backing with capital while shares have to be covered with 39-49% equity capital and real estate with 25%. This evaluation does not take into account that government debt can also be risky, Zimmerer said. On the contrary, the capital backing of shares and real estate is too high, in his view, and therefore insurance companies invested less in these asset classes.

As a consequence of the low market interest rates the returns on several other asset classes, such as shares or “Pfandbriefe”, are also declining. This is because the returns are composed of both the market interest rate and a risk premium. At present, not only market interest rates are decreasing but also the risk premia. The reason is that, in the low interest rate environment, a lot of investors are searching for investment opportunities with high returns. Accordingly, many asset classes are overvalued. Therefore, if a new crisis will break out, high price losses would be likely, Zimmerer said. In the currently low interest rate environment higher returns could be made by investing, for example, in non-listed investments or infrastructure.