Germany’s Allianz after the collapse of the U.S. $11b fund embraces safe bonds.

For years, Allianz, one of the largest investors in the world, invested billions in real estate, wind farms, and even London’s sewage system. However, the company is now moving away from such “alternative” investments in favor of standard bonds, according to those with knowledge of the situation.

The German company’s new strategy coincides with a fundamental shift in the financial landscape, as central banks raise interest rates to rein in spiraling inflation, leading to greater yields on traditional assets, according to the sources, who spoke on the condition of anonymity.

They emphasized that the reallocation will take place gradually, without any fire sales, and that the new funds would primarily be invested in fixed income rather than alternative forms of investing.

Allianz opted not to respond.

The move by Germany’s largest financial company in terms of assets and market value shows a significant shift away from alternatives that boosted returns in an era of ultra-low and even negative interest rates and towards the multi-trillion dollar market for investment-grade bonds, which keep governments afloat and pensioners fed.

The repositioning for Allianz comes at the same time as efforts to repair its reputation following the $6 billion in fines and settlements for fraud in the United States that were disclosed last year. Due to this, a portion of its U.S. asset management division entered into a guilty plea agreement for the behavior, which, according to its own attorneys, was the legal equivalent of the “death penalty.”

One of the participants mentioned how the fund’s fiasco had negatively impacted Allianz’s solvency ratio, a gauge of financial strength, and how the new investing strategy would assist to improve it.

The company’s reassessment was highlighted by Giulio Terzariol, Allianz’s chief financial officer, who stated on a conference call with analysts in November that “the value proposition of fixed income is considerably more compelling compared to a few years ago… it’s a different game.”

The company’s investment mix will be updated annually in the results of Allianz, which are expected on Friday.

With 2.6 trillion euros ($2.79 trillion) in assets under management through bond juggernaut Pimco and Allianz Global Investors, whose U.S. branch controlled the funds at the center of its most recent crisis, the global insurer Allianz ranks among the largest money managers in the world.

When Michael Diekmann, the current group chairman, was the company’s CEO, Allianz started exploring alternatives. He lamented the potholes on the roads between Salzburg and Munich in a speech on his last day of employment in 2015, underlining the need for infrastructure improvements. He promised that infrastructure would be one of the so-called “real asset classes” that Allianz would increase from 80 billion to 110 billion euros.

Based on calculations by reporters using Allianz financial documents, Allianz has since boosted its alternative investments by 350% to more than 200 billion euros, while fixed-income investments have increased by 40% and equities by 30%.

The stake in London’s new sewage tunnel and wind farms from the United States to Finland were two of the major purchases.

The majority of Allianz’s alternative assets are made up of the real estate, which included 700 million euros in shares in the Hudson Yards complex in New York and a skyscraper in Frankfurt that is part of a 1.4 billion euro property development.

However, the persons stated that due to the changes in the investing environment, Allianz is searching for chances to divert fresh funds into alternative investments, such as fixed income.

Allianz Real Estate’s CEO for Europe, Annette Kroeger, stated that her company takes a “wait and see” approach to real estate. She told reporters, “We look forward, like the rest of the market, with caution.”

Even Japan’s bond yields have been trending higher recently, an indication of the times that are changing and that the period of ultra-easy monetary policy is coming to an end.

Allianz is not the only company reevaluating options. The asset management division of Goldman Sachs intends to drastically cut its $59 billion in alternative investments.

The relatively riskier alternative assets in Allianz’s portfolio have been noted by credit rating agencies Moody’s and S&P, which both give Allianz good grades.

Alternative investments have a cost, and because they are less liquid than bonds, Allianz and other insurers must set aside extra capital to buy them.

Some of the persons stated that Allianz is hoping the change will assist in raising its capitalization and solvency ratios, which measure how the business would fair in a crisis.

According to Allianz’s financial statements, its so-called Solvency II capitalization ratio, a crucial indicator of financial strength, declined from 229% in 2018 to 199% at the end of the third quarter of last year, in part as a result of fines and settlements related to the U.S. fund fraud.

The issue came to light in early 2020, when markets were shaken by the coronavirus outbreak and $11 billion in funds collapsed.

The fraud, according to the U.S. prosecutors, comprised faked risk reports, fabricated papers, and changed spreadsheets.

According to a presentation Allianz lawyers made to the U.S. Department of Justice last year, which was made public in a court filing last month, Allianz paid $1.49 billion to one of its major investors, Blue Cross Blue Shield, as part of the $6 billion in settlements and fines, in an effort to “generously” compensate.

Blue Cross Blue Shield’s legal counsel declined to comment.

The guilty plea that Allianz ultimately accepted for the U.S. firm, according to Allianz lawyers, was “a death sentence for a registered investment adviser,” they claimed in the same presentation.

Allianz was forced to shut down Allianz Global Investors in the US as a result, dealing the business significant damage.