portfolio institutionell Awards 2023 GERMANY: ADAPTING TO A NEW WORLD


ESG, real estate and infrastructure dominated portfolio institutionell’s conference examining where Germany’s institutional investors are heading after a difficult 2022.


Last year everything changed. Conventional investment wis- dom lost its certainty as bond and equity valuations simultane- ously fell while consumer prices jumped. Indeed, they more than doubled to almost 8% in Germany, Europe’s largest econ- omy. It is difficult therefore to omit the country when assessing the global investment markets. For that reason, we asked our sister publication, portfolio institutionell, if we could attend their annual conference to discover what the issues are for Germa- ny’s institutional investors following such a tumultuous year. The conference kicked off with Peter Bofinger, a professor of economics at the University of Würzburg, giving his view on whether the European Central Bank’s monetary policy is too restrictive. He concluded that the decisions the bank makes are, at times, too dependent on data. So where does this leave ESG, given that asset owners complain about a lack of disclo- sure. Another issue is where should interest rates sit given the volatility witnessed in the bond and equity markets last year. Rising interest rates could provide lenders with a buffer against future volatility. However, for Jim Caron, CIO for global bal- anced risk control at Morgan Stanley, there is no guarantee that the returns collected in the past few decades will be available in the years ahead. He expects higher correlations and that 2022 will not be an isolated case. “We had a big bond bull market for 40 years – that should be over now,” he said. “Thus, in this new environment, there could be higher correlations over a three- year cycle and lower returns with volatility over five-to-10 years. “The 60:40 concept worked as long as bond yields fell,” Caron said. “In the future, 60:40 will just be a number.” Dr Ulrich Kaffarnik, a director of fund manager DJE Kapital, agrees that return expectations should be scaled back. “But I don’t share the view that the correlation between stocks and bonds will remain high going forward. That’s why mixed port- folios like 60:40 will work well again in the future,” he said.


44 | portfolio institutional | September 2023 | Issue 126


Going green: challenging times No matter how portfolios are structured in the coming years, ESG is likely to play a role. Yet investors face issues on conflict- ing goals, regulation and data. Asset owners are becoming so sophisticated in this area that some have created their own scoring system to assess a corporate’s ESG profile. These systems are not always positively viewed by asset manag- ers, said René Hermanns, head of investment at the North Rhine Dental Association’s pension scheme. “Different provid- ers treat ESG reporting differently,” Hermanns said, ranging from those who take ESG seriously to those who don’t. BVV Versicherungsverein des Bankgewerbes, the €33bn insur- ance association of the banking industry, has developed its own ESG reporting system. Head of risk, Christian Wolf, said: “We started implementing a questionnaire in 2018, which was sent to all external managers in the illiquid area,” Wolf added. “Our questions were divided into policy, governance, ESG instru- ments and reporting.”


BVV now sends its questionnaire to all asset managers and is part of its due diligence for new investments. The North Rhine Dental Association’s pension scheme, on the other hand, pursues a pragmatic and transparent approach. The scheme’s asset managers are regularly asked how they classify the assets in their portfolios. “In numbers from one to 100, from one to five, or in school grades. That requires trust. If possible, the statement is confirmed by an auditor. That’s what we’re working towards,” Hermanns said. The scheme then converts this information into an in-house ESG score based on its own formula. However, this procedure must also allow for assets with a weak ESG score. “In addition to the current score, the trend in movement is particularly important. If the path is right, the score gets better from year to year,” Hermanns said.


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