Risk. Management. Reward.

Strategic Asset Allocation in Times of Financial Repression

The second study of our Smart Risk Series discusses the relevant determining factor for a portfolio’s returns, the Strategic Asset Allocation.

Understand. Act.

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Risk. Management. Reward.

Content

Imprint

4 Strategic Asset Allocation in Times of Financial Repression

4 Current Situation

6 Characterisation of the Asset Class Universe

7 Determining and Analysing Strategic Asset Allocation

10 Understand. Act.

10 Appendix

Allianz Global Investors Europe GmbHBockenheimer Landstr. 42 – 4460323 Frankfurt am Main

Global Capital Markets & Thematic ResearchHans-Jörg Naumer (hjn)Dennis Nacken (dn)Stefan Scheurer (st)

Data origin – if not otherwise noted: Thomson Reuters Datastream

Risk. Management. Reward.

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Strategic Asset Allocation in Times of Financial Repression

Due to this low interest-rate environment, long-term investors are facing some major new challenges. Institutional investors’ target-returns corridor – life insurance companies’ average guaranteed interest rate or the actu-arial interest rate of corporate pension plans – usually lies somewhere between 3 % and 4 %. Investors such as insurance companies and pension vehicles, which manage assets of around EUR 7.7 trillion1 in Europe, are currently having a hard time generating ade-quate returns for servicing liabilities or meet-ing guarantees by investing in bonds. Today, returns of more than 4 % in the bond segment are a rare sight. Only non-investment grade2

corporate bonds (high-yield bonds) and

Current Situation

Since the spectacular collapse of Lehman Brothers and the ensuing financial market turbulence, easy money policy has started to have an enormous influence on financial mar-kets. The market environment is characterised by low nominal interest rates in combination with sometimes negative real returns. It is quite realistic to assume that the low interest-rate environment will continue for some time to come. Experts also believe that inflation could start to rise. We call this combination of low-interest-rate policies and inflationary tendencies (and / or anticipated inflation) financial repression.

Dr. Wolfgang MaderDr. Wolfgang Mader is Director of risklab GmbH, the experts in investment and risk consulting at AllianzGI Global Solutions. He is Head of Asset Allocation Strategies and Economic Scenario Generation. In this position he is primarily respon-sible for the fields of Strategic and Dynamic Asset Allocation as well as Risk Management.

Dr. Christian Schmitt Dr. Christian Schmitt is Managing Director of risklab GmbH. He is Head of the Asset Liability Management division. In this position he is primarily responsible for the fields of Investment Consulting & Analytics.

1ECB, “Euro area insurance corporation and pension fund statistics”, Dec. 2012

risklab GmbH (“risklab”) is an Allianz Global Investors company registered with Bundesanstalt für Finanzdienstleistungs aufsicht (www.bafin.de) as a provider of financial services in Germany. risklab provides risk management and strategic and dynamic asset allocation solutions to support the investment advisory activities of properly registered and licensed affiliates of Allianz Global Investors throughout the world. Please see the last page of this document for information con-cerning these affiliates.

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emerging market bonds with longer maturi-ties still seem to offer opportunities for rela-tively attractive returns.

Alongside the decline in anticipated income, available risk budgets have fallen as a result of the financial crisis, leading to frequent port-folio de-risking (looking for defensive invest-ments to minimise portfolio risks). However, this search for security is deceptive in such an environment. While investors are busy look-ing for “safe havens”, these opportunities are becoming rarer and rarer. So rare, in fact, that many investors end up with extremely low or negative real returns, reducing the likelihood of achieving intended or necessary target returns and increasing the risk that they could miss them altogether.

Strategic asset allocation (SAA) plays a pivotal role in determining the extent to which over-all investment results fluctuate. This step is therefore the most elementary decision when deciding on an investment program. In this paper, we will take a closer look at what stra-tegic asset allocation should look like given the current climate of financial repression. We will use a portfolio health check to analyse various allocations.3 Although these are “only” simulations and forecasts are no guarantee of future developments, the findings allow us to draw some interesting conclusions.

Our starting point is a portfolio consisting of 70 % bonds (40 % government bonds from core Eurozone countries and 30 % corporate

bonds) and 30 % equities (developed markets, see chart 1).

Our analyses show that the simulated long-term annual return (ten-year horizon aver-age) of the basis portfolio – despite the sig-nificant share of equities – is only 2.9 %. This is below the envisaged target return, which should have been 4 % in the case under consideration. Return expectations are accompanied by an anticipated volatility of 4.9 %. Measured against the benchmark, the realised returns as the result of such an allocation, at 4.2 % annual returns and 4.7 % volatility, have historically been higher than the returns target since 2000. These attractive returns, which were predominantly the result of falling interest rates, seem unlikely to repeat themselves in the future.

When determining a better suited SAA, two basic steps are therefore necessary:

• Increasing the average share of return-generating risky assets in order to raise the portfolios’ targeted returns.

• Broadening the investment universe beyond asset classes and regions with an eye towards correlation structure and taking advantage of the potential for diver-sification. This helps the effort to reduce risk while keeping forecast returns steady.

In the following sections, we will examine these steps and their effects on the portfolio in greater detail.

30 % World Equities

40 % EUR Core Government Bonds

30 % EUR Corporate Bonds

Chart 1: Base Portfolio for the Strategic Asset Allocation

Source: risklab, Allianz Global Investors as of March 2013; The hypothetical performance and simulations shown are for illustrative purposes only and do not represent actual performance; they are not a reliable indicator for future results. Using an asset allocation strategy does not assure a profit or protect against loss. You should consider your investment time frame, risk tolerance level and investment goals. This should not be construed as investment advice.

2 non-investment grade is a bond rating being below BBB, that signifies low cred-it quality with a relatively high risk of defaulting.

3 A portfolio health check offers interactive portfolio analysis within the context of current capital market conditions and assess-ments of various growth and inflation scenarios. These are based on quantitative analyses and simulation techniques.

Risk. Management. Reward.

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Characterisation of the Asset Class Universe

The following overview shows a universe of asset classes that can be used to achieve a broad diversification of the allocation.

Government bonds from core countries, especially Germany, are anchors that defend a portfolio’s safety. Thanks to pronounced diversification features compared to high-risk classes (such as equities), they improve the SAA’s risk / return profile. However, in light of potential interest rate hikes, lower proportions of government bonds appear advisable for current allocations.

Corporate bonds, with significant spreads that go beyond AAA bonds, appear to be an attractive basis investment for a portfolio. The moderate duration4 – of EUR issues in particu-lar – also makes the class strong against the backdrop of potential interest rate hikes. The BofA ML Euro Corporate benchmark com-prises bonds from companies based in the Eurozone that have an investment-grade rat-ing. The bonds are principally issued in EUR.

Market risk / categorisation Asset Classes Benchmark

Defensive

EUR Core Government Bonds BofA ML AAA Euro Government Index

EUR Corporate Bonds BofA ML Euro Corporate Index

Balanced

Hedge Funds / Absolute Return HFRI Fund of Funds Index

Volatility risklab Variance Premium Trading Index

Infrastructure Debt No Benchmark

Infrastructure Equity No Benchmark

Real Estate UK IPD All Property TR Index

Emerging Markets Government JPG Emerging Market Bond Index Diversified hedged in EUR

Global High-Yield Bonds BofA ML Global High Yield Constrained Index hedged in EUR

Chance

World Equities MCSI World TR Net Index in EUR

Emerging Market Equities MCSI Emerging Markets TR Net Index in EUR

World Equities Small Cap MSCI World Small Cap TR Net Index in EUR

Chart 2: Characterisation of the Asset Class Universe for a broader Diversification

Source: risklab, Allianz Global Investors; The hypothetical performance and simulations shown are for illustrative purposes only and do not represent actual performance; they are not a reliable indicator for future results.

The Hedge Funds / Absolute Return asset class predominantly uses the money market to cover funds with a specific returns target. Its goal is to generate higher income than government bonds with a comparable risk profile, but without government bonds’ explicit sensitivity to interest rates. The class ranges from highly liquid Undertakings for Collective Investments in Transferable Securi-ties (UCITS) funds to less liquid hedge-fund investments, depending on requirements and the volume to be allocated. The Hedge Fund Research, Inc. (HFRI) Fund of Funds Index serves as a benchmark for diversified invest-ment in various hedge-fund styles.

Volatility, as an asset class, profits systemati-cally from risk premiums by selling implied volatility versus realised volatility. The fluctua-tions of major trading indices (such as Euro-Stoxx 50, S&P 500) form the main basis for making decisions. The risklab Variance Pre-mium Trading Index serves as a benchmark for this asset class.

Infrastructure investments are investments ranging from basic project financing and

4 Duration is a measure of sensitivity of the price of a fixed-income investment to a change in interest rates.

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holding a stake in a wide range of conven-tional infrastructure projects (such as motor-ways) through to renewable energy. The asset class is divided into two different seg-ments: Debt and Equity. Debt has the general risk / return profile of a corporate bond. No explicitly adequate benchmark exists on account of infrastructure debt’s unique char-acter. However, it is possible to look at time series, such as the BofA ML Euro Single A Utili-ties Index, as part of historical observations. Equity, the other segment, corresponds to the role of an equity investor in infrastructure projects. As each individual project has a dif-ferent focus, no single benchmark is adequate to serve as a profile.

Real estate investments (such as direct invest-ments) are an additional basis investment and should naturally be considered to be less liquid. The benchmark includes both residen-tial and commercial properties.

Government bonds from emerging markets offer attractive spreads against the backdrop of individual countries’ relatively low debt ratios. The JPM Emerging Market Bond Index Diversified benchmark comprises hard cur-rency bonds that are quoted solely in US dollars. The dollar risk is hedged for Eurozone investors. The benchmark also limits the weight of certain countries in the index in order to ensure adequate basic diversification.

Global high-yield bonds may also offer attrac-tive spreads, albeit at a higher risk. The BofA

ML Global High Yield Constrained Index benchmark comprises a global portfolio of corporate bonds with a sub-investment grade rating quoted mainly in US dollars, euros and pounds sterling. The exchange-rate risk is hedged for Eurozone investors. The bench-mark also limits the weight of certain compa-nies in the index in order to ensure adequate basic diversification.

Equities investments are an opportunity-oriented asset class that make it possible to profit from mid- to long-term risk premiums. The MSCI World and MSCI Emerging Markets benchmarks are market-wide indices that offer a wide range of coverage. They contain individual equities from large and mid caps based in industrialised countries and emerg-ing markets. MSCI World Small Cap includes small caps from industrialised countries.

Determining and Analysing Strategic Asset Allocation

We will now take a look at the quantitative effects on the anticipated portfolio results on the basis of the asset classes profiled.

Chart 3 shows an example of the composi-tion of an alternative, diversified portfolio. The proportion of bonds was reduced by 20 % in favour of equities and a 15 % new invest-ment in alternative asset classes. At the same time, diversification was increased by way of a wider spread within the bond and equities segment.

2 % Hedge Funds2 % Volatility2 % Infrastructure Equity

5 % Infrastructure Debt4 % Real Estate

5 % World Equities Samll-Cap

18 % World Equities 25 % EUR Corporate Bonds

5 % Global High Yield Bonds

15 % EUR Core Government Bonds

5 % Emerging Markets Gov. Bonds USD12 % Emerging Market Equities

Chart 3: Alternative Portfolio for the Strategic Asset Allocation

Source: risklab, Allianz Global Investors as of March 2013; The hypothetical performance and simulations shown are for illustrative purposes only and do not represent actual performance; they are not a reliable indicator for future results. Using an asset allocation strategy does not assure a profit or protect against loss. You should consider your investment time frame, risk tolerance level and investment goals. This should not be construed as investment advice.

Risk. Management. Reward.

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Risk & Return Long-term Profile Base Profile Alternative Profile

Return (p. a.) 2.9 % 4.0 %

Volatility p. a. 4.9 % 6.4 %

Sharpe ratio 0.28 0.39

CVaR* Confidence Level

1 year 95 % –7.9 % –9.9 %

5 years 95 % –9.2 % –9.5 %

Chart 4: Comparison of the Expected Long-term Risk-Return Profile of the Sample Portfolios

Source: risklab, Allianz Global Investors, Period: 29 / 02 / 2000 to 31 / 03 / 2013; The hypothetical performance and simulations shown are for illustrative purposes only and do not represent actual performance; they are not a reliable indicator for future results.

The alternative portfolio’s long-term antici-pated volatility, at 6.4 %, should be 1.5 per-centage points per year higher than that of the base profile. Conditional value-at-risk (over the period of one year and at a confi-dence level of 95 %) should also rise on the basis of our simulations from –7.9 % to –9.9 %.

RC in %

AW in %

Risk Portfolio –7.9 % Diversi�cation Bene�t 4.7 %

AW in %

Hig

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RC in %

Hig

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0 10 20 30 40 50 60 70 80 90 1000

–2.5

–5.0

–7.5

–10.0

–12.5

–15.0

0 10 20 30 40 50 60 70 80 90 1002.5

0.0

–2.5

–5.0

–7.5

–10.0

–12.5

–15.0

–17.5

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Risk Portfolio –9.9 % Diversi�cation Bene�t 6.3 % Risik Undiversi�ed Portfolio –16.3 %

Chart 5: Risk Decomposition of Base and Alternative PortfolioRisk contribution (RC) in relation to asset class weights (AW)

Risk is defined here as expected long-term portfolio volatility or expected CVaR

Risk Contribution (RC) = asset class contribution to portfolio risk – vertical axis

Asset Weights (AW) = weight of each asset in the portfolio – horizontal axis

Diversification Benefit compari-son to a base of 100 % (100 % = the expected risk for each portfolio)

Undiversified portfolio risk assumes simultaneous occurrence of losses in all asset classes

In the case at hand, re-risking would be necessary alongside diversification, indicating the need to provide an additional risk budget to achieve target returns in the long term due to the current capital market situation. How-ever, the increased risk is adequately compen-sated for, as demonstrated by the comparably higher Sharpe ratio5 (0.39 vs. 0.28).

5The Sharpe ratio measures a risk adjusted perfor-mance, subtracting the risk free rate from the rate of return for a portfolio dividing by the standard deviation of the portfolio returns.

Source: risklab, Allianz Global Investors. Figures shown are based on data as at end of March 2013. The hypothetical performance and simulations shown are for illustrative purposes only and do not represent actual performance; they are not a reliable indicator for future results.

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Although the perception of an increased risk turns out to be true over the course of a single year, the alternative portfolio’s CVaR level is comparable over a five-year period. This is a result of the alternative portfolio’s higher anticipated returns in the long term, among other factors.

It is worth mentioning that the historically lower volatility of the basis portfolio appears deceptive at second glance. A future-oriented risk analysis reveals that the concentration risk in the basis allocation is comparably high. The risk analysis, depicted as a risk cascade, in chart 5 shows the risk contribution of each asset class in relation to its share of the portfolio as well as the diversification effect (far right), which results from comparing the overall risk and the sum of the individual risks. It becomes apparent that the equities had the highest risk contribution in the portfolio. How-ever, the alternative portfolio has a higher diversification effect, which increases from 4.7 % to 6.3%. As a result only a minimum additional risk was accepted for a higher anticipated return.

6 Source: Allianz Global Investors Risk Matters, Edition 3, 2013, available at http://www.riskmatterson-line.com / preparing-for-a-fall-diversification-and-risk-management-at-times-of-market-stress/

Chart 6: Sensitivity to Economic Growth and Inflation

GDP Growth Ratefalling risingIn

flatio

n Ra

tefa

lling

risin

g

Current PortfolioReturn (p.a.)

Volatility (p.a.)

Sharpe Ratio

2.9 %

6.3 %

0.05

Alternative PortfolioReturn (p.a.)

Volatility (p.a.)

Sharpe Ratio

1.4 %

10.8 %

–0.11

Delta Return

Delta Volatility

–1,5 %

4,5 %

Return in %

Volatility in %

–1.02.05.08.0

11.014.017.0

3.0 5.0 7.0 9.0 11.0–1.0

2.05.08.0

11.014.017.0

3.0 5.0 7.0 9.0 11.0

–1.02.05.08.0

11.014.017.0

3.0 5.0 7.0 9.0 11.0–1.0

2.05.08.0

11.014.017.0

3.0 5.0 7.0 9.0 11.0

Current PortfolioReturn (p.a.)

Volatility (p.a.)

Sharpe Ratio

9,6 %

7,0 %

1,07

Alternative PortfolioReturn (p.a.)

Volatility (p.a.)

Sharpe Ratio

14.9 %

10.0 %

1.29

Delta Return

Delta Volatility

5.3 %

3.0 %

Return in %

Volatility in %

Current PortfolioReturn (p.a.)

Volatility (p.a.)

Sharpe Ratio

2.5 %

4.4 %

–0.12

Alternative PortfolioReturn (p.a.)

Volatility (p.a.)

Sharpe Ratio

2.9 %

6.5 %

–0.02

Delta Return

Delta Volatility

0.4 %

2.2 %

Return in %

Volatility in %

Current PortfolioReturn (p.a.)

Volatility (p.a.)

Sharpe Ratio

3.5 %

4.5 %

0.31

Alternative PortfolioReturn (p.a.)

Volatility (p.a.)

Sharpe Ratio

5.9 %

6.3 %

0.59

Delta Return

Delta Volatility

2.4 %

1.8 %

Return in %

Volatility in %

It is possible to reduce portfolio risk through diversification when imperfectly correlated investments are included in the portfolio. The article “Preparing for a Fall – Diversification and Risk Management at Times of Market Stress”6 demonstrates empirically that the positive effect of diversification, the reduction of portfolio variance, can also be seen in times of crisis. Although the correlation between individual investments increases along with an asset class’s risk in the short term during extreme market turbulence, the investments found in a well-diversified portfolio are not perfectly correlated. This becomes particularly apparent over longer investment horizons. With overall risks higher during times of crisis, the relative benefit offered by diversification is even greater than during calm market phases.

Looking back, the alternative portfolio may be associated with higher risks (more volatile), but the more balanced asset allocation should reduce the overall risk of the portfolio in the long term. This becomes particularly clear when we evaluate risk and return within a supposed inflationary climate. The analysis of

Source: risklab, Allianz Global Investors, Period: 29/02/2000 to 31/03/2013; The hypothetical performance and simulations shown are for illustrative purposes only and donot represent actual performance; they are not a reliable indicator for future results.

Risk. Management. Reward.

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the portfolios in various historical inflationary scenarios7 shows that the alternative portfolio delivered higher historically realised returns and a higher Sharpe ratio than the basis port-folio during periods of rising inflation. It also performed better in periods of falling inflation in anticipation of rising gross domestic prod-uct growth (GDP). The alternative scenario only faired worse in a climate of falling infla-tion combined with slow growth. This shows us that a more diversified portfolio has his-torically provided investors with a more solid footing for the anticipated climate of financial repression.8

7The portfolio health check economic scenario analysis shows how various asset classes and the investi-gated portfolios performed historically under a variety of growth and inflationary conditions. The historical analysis was divided into four scenarios involving rising or falling growth and / or inflation rates (based on quarterly, year-on-year Eurozone GDP-growth data and inflation rates between March 2000 and March 2013).

8 Past performance is not a reliable indicator of future results.

Understand. Act.

In our view, strategic asset allocation is the most important factor for the portfolio return. However, generating an adequate return is a major challenge in today’s low interest-rate environment.

A greater focus on investing in high-potential asset classes is therefore the first step in targeting adequate returns. Alongside this “re-risking” of the portfolio, broad diversifica-tion of investments plays a pivotal role, as the spreading of risks within the portfolio should principally lead to a more attractive risk / return profile.

But diversification alone is not enough to effectively limit risk over time. As the char-acteristics of high-risk investments change in phases of stress and the losses within a portfolio can grow too serious, dynamic risk management is also a must. Such risk man-agement can enable investors to effectively hedge losses, thereby protecting risk capital while allowing them to nevertheless profit from potential performance.

Appendix

InputAsset classes and benchmarks used for the base and alternative portfolio are as follows. The hypothetical performance and simula-tions shown describe the long term (10 years average) expectations of the yearly perfor-mances and volatilities of each asset class. The historical yields and volatilities (p. a.) were calculated in the time between 29/2/2000 and 31/03/2013.

Forward-looking analyses Forward-looking analyses are based on data from simulations of the risklab Economic Scenario Generator.

• Riskfree rate: expected long-term average annual return on the money market

• The expected returns and volatilities of the asset classes are derived from the current market conditions plus the long-term nor-mative assumptions (which are expected to hold at the end of a 10-year period):

– Inflation: 2 % per annum – Yield of German government bonds

(zero-coupon bonds): 1-year bond 3 %, 10-year bond 4 %

– Spreads: swap 0.35 %, AA 0.65 %, A 0.8 %, BBB 1 %

– Equity premium: developed markets 4 %, emerging markets 5 %

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Asset Class Benchmark CurrencyExpected

Return (p.a.)Expected

Volatility (p.a.)Historic

Return (p.a.)Historic

Volatility (p.a.)

Gov. Bonds EUR JPM EMU Investment Grade Index EUR 1.9 % 5.4 % 5.4 % 3.8 %Gov. Bonds Core EUR BofA ML AAA Euro Government Index EUR 0.9 % 4.5 % 5.6 % 3.9 %Gov. Bonds US BofA ML US Treasury Index hedged in EUR 1.0 % 4.5 % 6.0 % 4.7 %Pfandbriefe BofA ML Euro Pfandbrief Index EUR 1.5 % 2.4 % 4.9 % 2.2 %Covered Bonds EUR BofA ML Euro Covered Bond Index EUR 2.2 % 3.2 % 5.2 % 2.7 %Gov. Bonds l.-L EUR Barclays Euro Govt Inf-Linked Bond Index EUR 1.6 % 5.7 % 5.6 % 5.1 %Corporates EUR BofA ML Euro Corporate Index EUR 2.4 % 3.8 % 5.4 % 3.5 %Corp. Fin. EUR BofA ML Euro Financial Index EUR 2.8 % 4.6 % 5.1 % 4.2 %Corp. Non-Fin. EUR BofA ML Euro Non-Financial Index EUR 2.1 % 3.4 % 5.8 % 3.2 %High Yield Global BofA ML Global High Yield Constr Index hedged in EUR 3.9 % 10.7 % 8.0 % 10.4 %Gov. Bonds Em. Mkts. USD JPM Em Mkts Bond Global Div Index hedged in EUR 3.7 % 8.5 % 11.0 % 8.8 %Equity Europe MSCI Europe Net TR Index EUR 6.1 % 15.6 % 0.9 % 16.2 %Equity North America MSCI North America Net TR Index EUR 6.0 % 14.4 % 0.2 % 16.2 %Equity Asia MSCI Paci�c Net TR Index EUR 5.7 % 14.5 % –0.4 % 16.2 %Equity Em. Mkts. MSCI Emerging Markets Net TR Index EUR 7.0 % 19.9 % 6.0 % 21.7 %Equity World MSCI World Net TR Index EUR 6.0 % 13.7 % 0.3 % 15.1 %Equity World Small-Cap MSCI World Small Cap Net TR Index EUR

EUR

6.5 % 16.4 % 5.9 % 17.8 %Real Estate UK IPD All Property TR Index hedged in EUR 3.7 % 9.3 % 6.5 % 4.5 %Infrastructure Debt BofA ML Euro Single A Utilities Index 4.3 % 5.4 % 6.4 % 3.6 %Infrastructure Equity – EUR 6.0 % 4.0 % 0.0 % 0.0 %Commodities DJ UBS Commodity TR Index hedged in EUR 4.5 % 17.7 % 4.9 % 17.4 %

Volatility risklab Variance Premium Trading Index EUR 5.1 % 5.0 % 7.2 % 5.3 %Hedge Funds HFRI Fund of Funds Index hedged in EUR 4.6 % 5.1 % 3.5 % 5.4 %Private Equity LPX50 TR Index EUR 10.0 % 18.1 % –3.0% 24.9 %Cash EUR Libor 1 Month TR Index EUR 1.5 % 1.4 % 2.5 % 0.4 %

Probability

Expected return0 %VaR95%CVaR95% Portfolio return

Value-at-Risk (VaR)For a given portfolio, probability and time horizon, VaR is defined as a threshold value such that the probability that the mark-to-market loss on the portfolio over the given time horizon exceeds this value – assuming normal markets and no trading in the portfo-lio – is the given probability level.

Conditional-Value-At-Risk (CVaR)The CVaR is calculated by assessing the likeli-hood (at a specific confidence level) that a specific loss will exceed the value at risk. Mathematically speaking, CVaR is derived by taking a weighted average between the value at risk and losses exceeding the value at risk.

Return & Risk

Note: We use the risklab Variance Premium Trading Index as the benchmark for volatility in the historical analyses. The benchmark’s exposure to the volatility risk premium is similar to that of the forward-looking data. We use the BofA ML EUR Single A Utilities Index as the benchmark for infrastructure debt in the historical analyses. We consider this benchmark representative albeit exhibiting a lower duration than typical for the asset class. The forward-looking assump-tions are based on expert input for a sample portfolio of EUR senior debt investments into construction and operational phase of Public Private Partnerships, transport concessions and regulated utilities (Source: AllianzGI infrastructure debt team). Note also that returns are stated before all fees, and that such returns will be decreased by asset management fees, but increased by commitment and front-end fees paid directly by the borrower, the expected net effect of such fees is considered to be neutral and no greater than ± 0.1%. There are no representative, commercially available benchmarks for infrastructure equity as an asset class. Therefore, we currently use zero returns for the asset class in the historical analyses. The forward-looking assumptions are based on expert input for a mixture of 1/3 wind energy and 2/3 solar energy investments (Source: AllianzGI infrastructure equity team). For consistency of comparison across investment opportunities, infrastructure debt, infrastructure equity and private equity returns have been derived under the assumption of being already fully invested from the beginning, when, in fact, a more gradual accretion of investment is likely.Source: risklab, Allianz Global Investors, Period: 29 / 02 / 2000 to 31 / 03 / 2013; The hypothetical performance and simulations shown are for illustrative purposes only and donot represent actual performance; they are not a reliable indicator for future results.

Risk. Management. Reward.

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Do you know the other publications of Capital Market Analysis?

Risk. Management. Reward. → Smart Risk investing in times of financial repression

→ Managing Risk in a time of Deleveraging

→ Active Management

→ The New Zoology of Investment Risk Management

→ Constant Proportion Portfolio Insurance (CPPI)

→ Portfolio Health Check®: Preparing for „Financial Repression“

Financial Repression → Shrinking mountains of debt

→ International monetary policy in the era of financial repression: a paradigm shift

→ Financial Repression and Regulation: Paradigm Shift for Insurance Companies & Institutions for Occupational Retirement Provision

→ „Silent Deleveraging or debt haircut?“ – that is the question

→ Financial Repression – A silent way to reduce debt

→ Financial Repression – It is happening already

EMU You can find our wide-ranging supply of publications on the euro on our site Eurozone Resource Center

Bonds → Duration Risk: Anatomy of modern bond bear markets

→ Emerging Market currencies are likely to appreciate in the coming years

→ High Yield corporate bonds

→ US High-Yield Bond Market – Large, Liquid, Attractive

→ Credit Spread – Compensation for Default

→ Corporate Bonds

→ Why Asian Bonds?

Dividends → Dividend Strategies and Troughs in Earnings Revisions

→ Dividend Stocks – an attractive addition to a portfolio

→ Dividend strategies in an environment of inflation and deflation

→ High payout ratio = high earnings growth in the future

Changing World → Renewable Energies – Investing against the climate change

→ The green Kondratieff

→ Crises: The Creative Power of Destruction

Demography – Pension → Discount rates low on the reporting dates

→ IFRS Accounting of Pension Obligations

→ Demographic Turning Point (Part 1)

→ Pension Systems in a Demographic Transition (Part 2)

→ Demography as an Investment Opportunity (Part 3)

Behavioral Finance → Reining in Lack of Investor Discipline: The Ulysses Strategy

→ Overcoming Investor Paralysis: Invest more tomorrow

→ Outsmart yourself! – Investors are only human too

→ Two minds at work

All our publications, analysis and studies can be found on the following webpage:http://www.allianzglobalinvestors.com

www.twitter.com / AllianzGI_VIEW@AllianzGI_VIEW

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Notes

Risk. Management. Reward.

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Notes

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risklab is not licensed to conduct business outside of Germany and is not registered with the United States Securities and Exchange Commission or any regulatory authority in Asia Pacific.

Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.

The hypothetical performance and simulations shown are for illustrative purposes only and do not represent actual perfor-mance; they are not a reliable indicator for future results. Back-testings and hypothetical or simulated performance data has many inherent limitations only some of which are described as follows:

(i) It is designed with the benefit of hindsight, based on historical data, and does not reflect the impact that certain economic and market factors might have had on the decision-making process, if a client’s portfolio had actually been managed. No back-testings, hypothetical or simulated performance can completely account for the impact of financial risk in actual perfor-mance.

(ii) It does not reflect actual transactions and cannot accurately account for the ability to withstand losses.

(iii) The information is based, in part, on hypothetical assumptions made for modeling purposes that may not be realized in the actual management of portfolios.

No representation or warranty is made as to the reasonableness of the assumptions made or that all assumptions used in achieving the returns have been stated or fully considered. Assumption changes may have a material impact on the model returns presented. The back-testing of performance differs from actual portfolio performance because the investment strat-egy may be adjusted at any time, for any reason.

Investors should not assume that they will experience a performance similar to the back-testings, hypothetical or simulated performance shown. Material differences between back-testings, hypothetical or simulated performance results and actual results subsequently achieved by any investment strategy are possible.

The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted.

This material has not been reviewed by any regulatory authorities. In mainland China, it is used only as supporting material to the offshore investment products offered by commercial banks under the Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations.

This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors US LLC, an investment adviser registered with the US Securities and Exchange Commission (SEC); Allianz Global Investors Europe GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); RCM (UK) Ltd., which is authorized and regulated by the Financial Services Authority in the UK; Allianz Global Inves-tors Hong Kong Ltd. and RCM Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; and Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator; Allianz Global Inves-tors Korea Ltd., licensed by the Korea Financial Services Commission; and Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan.

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