Institutional investors are missing out on 2.3% of potential annual returns due to the cost of regulation, a finding that Elizabeth Corley, chief executive of Allianz Global Investors (AGI), described as a “shocking statistic”.
The 2.3% is mainly an “opportunity cost” which capital controls and regulatory investment requirements create for investors.
AGI’s survey sheds light on the unintended consequences that Europe’s Solvency II Directive and similar regulations have on institutions who are forced to hold certain securities for solvency purposes that they otherwise would not want.
“This is a shocking statistic to me,” Corley says, adding that investors say the unattainable 2.3% of extra return is having a material impact on their ability to match liabilities.
The survey forms the findings of the first AGI RiskMonitor and states that nearly 27% of the investors are concerned about the impact of the political and regulatory environment on their ability to meet investment targets.
Corley, echoing the common criticism that regulation can distort asset allocation, says investors are channelled into lower yielding assets.
At the same time, 90% of the investors surveyed expect a positive return from global equities and many want to expand their equities allocation but do not have the risk budget to do so.
However, the survey also finds that investors largely acknowledge the need for, and benefits of, greater regulation, though 73% say regulation comes with a price. Just over half of the respondents expect the regulatory environment to become less favourable in the next three years, with pessimism particularly evident in Europe.
The RiskMonitor survey, the first in a series, covers nearly 400 senior decision makers at institutional investors from 41 countries, and it identifies rising interest rates and tail risks as the main concerns for investors.
Corley say: “Increasingly, institutional investors are recognising the long-term risk of short-term safety."
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