The head of institutional business for German and Austrian clients at Blackrock, Harald Klug, sees asset managers challenged by the markets. Topics such as private assets are much more critical than before. However, Klug notes that many investors are cautious about minimal providers and that BlackRock has advantages as an international company with a track record of over 20 years. The company manages a total of around 200 billion euros for customers in Germany and Austria. “Our institutional customers are an important part of our business here,” says Klug, although the company does not provide specific figures.

Private markets are becoming increasingly important in the industry, accounting for around 10 to 15% of BlackRock's portfolios. “Private market investments are an important growth driver for us.”

When allocating, some institutional investors may use specific regulatory requirements. Pension funds in North Rhine-Westphalia, for example, benefit from an infrastructure ratio of 5% in North Rhine-Westphalia - in addition to the general risk ratio of 35%. “This allows you to build up further risk without burdening the risk ratio.”

However, market developments also lead to problems. There are investors who are very heavily invested in private market investments and also have a lot of open capital commitments. “The “denominator effect” due to market shifts in individual asset classes means that customers have higher quotas than originally planned,” reports Klug. These investors have understandably become more cautious while others continue to build private market investments.

Customers who were more invested in private markets were able to navigate market fluctuations more easily. This has led to further acceptance of this asset class. The current question is how the benchmark interest rates, especially the long end of the yield curve, will evolve.

"The rise in interest rates has thoroughly disrupted the investment allocation for nearly all market participants," says Klug, who also worked at Pimco for several years. This particularly affects CTAs, which typically report under IFRS. With a Contractual Trust Arrangement (CTA), pension obligations are outsourced from a corporate's balance sheet.

According to CTAs, the rise in interest rates has opened up new opportunities for liability-driven investments (LDIs). These strategies are used, for example, to control the degree of funding of obligations. Market developments have led to significant changes. From an IFRS market valuation perspective, liabilities have fallen by 20 to 30% over the last 24 months.

Since liabilities have fallen more sharply than fixed assets, according to Willis Towers Watson, the Dax corporate sector now has an average funding ratio of 83%. “In the past, the industry had become accustomed to values ​​of 60% to 70% and is now reaching a new peak.”

An asset manager like Blackrock comes into play when it comes to the question of how investors and corporates deal with the changed conditions on the balance sheet and how the current financing can be secured - especially against the background of possible interest rate cuts in the next twelve months that are currently being discussed. “Avoiding a significant underfunding can be a great advantage for the company and also for the pensioners. The level of funding has been very volatile in the past, and this volatility needs to be reduced,” says Klug.

The LDI concept is, among other things, about reducing the balance sheet volatility of the discounted liabilities through hedging. “The interest rate sensitivity of the liabilities is company-specific, but you often see a duration between 15 and 20 years, and the discount curve is based on a credit rating of AA,” reports the investment professional.

“While in previous years people didn’t need LDI when interest rates were negative because they didn’t want to hedge against low-interest rates, the situation now looks completely different,” says Klug. This offers opportunities to adapt the strategy and allocation.

According to Klug, many customers expect more volatility in the coming year. “However, institutional investors react less tactically and only adjust their long-term asset allocation when necessary.” For 2024, many market participants will inevitably use the situation of high funding and the increased interest rate level to operate LDI systematically.

And because the environment has changed significantly, many adjustments need to be considered when fundamentally adjusting the asset allocation. Investors shouldn't wait too long. Klug: “The window of opportunity for attractive conditions to secure liabilities could close again, especially towards the second half of 2024.”