German asset managers have been urged to internationalise investments for bank and insurer clients to cope with depressed returns caused by low rates and regulation.
Banks and insurers need to adopt new investment strategies and risk models, says Professor Martin Hellmich, of the Frankfurt School of Finance and Management.
His study found that the average performance of proprietary portfolios at German banks fell from 5.2% in 2005 to approximately 1.8% in 2014 due to a decline in interest income.
Europe’s Solvency II regulation has created a situation for insurance companies that can only be tackled by companies with high equity ratios, the report says, and suggests that insurance companies must have investment expertise in asset classes generating higher returns, while adapting to greater risk and lower liquidity.
The report is part of a wider risk management study supported by Germany’s Union Investment and it finds that banks and insurance companies face significant challenges from Basel III and Solvency II.
Alexander Schindler, a member of Union Investment's board of managing directors and president of the European Fund and Asset Management Association, says it is advisable for investors like insurers to internationalise investments in order to profit from global variations in interest rates and growth.
He also advocates the use of risk-controlled equity strategies and real estate investments, and cites structured credit as a viable option for portfolio diversification.
The report says investors are influenced by regulatory parameters in a way that reinforces correlation between investors. It also impacts asset prices and heightens the risk of price bubbles.
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