Interview with Allianz Global Investors' James Macey

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Allianz Global Investors

Q&As and Interviews

Interview with Allianz Global Investors' James Macey

Shauna O'Brien Oct 29, 2014

We recently spoke with James Macey, CFA, a portfolio manager and vice president with Allianz Global Investors. Mr. Macey runs 13 funds for the firm and focuses on target date funds.

Below, he discusses several topics including target date funds and international investment matters.

Insights from James Macey

In a recent statement from Chip Castille, the head of the retirement group at BlackRock, he mentioned “target-date funds are one of the most important and successful financial innovations of the past 20 years.” We’re guessing you would agree, but could you expand on this development?

I absolutely think that target-date funds have been the most important and successful financial innovation since their launch 20 years ago. As defined benefit assets shrink and defined contribution plans grow in size, target-date assets have grown enormously to more than $650 billion dollars. I expect the industry to further evolve and for increased demands and expectations to be placed on target-date portfolio managers. The reason that target-date fund assets have grown so considerably is due in large part to the fact they take the burden of asset allocation and fund selection away from the individual and remove a lot of the emotion behind investing. However, there are significant differences among target date funds such as allocations to equities that an investor should be aware of.

Going forward, as you assess the investing landscape, what is your strategy towards allocation (bonds, equities)? What are the factors behind your investment approach?

I would consider the Allianz target-date funds to be among the most diversified, if not the most diversified in the industry. Our philosophy is quite simple – no one investor can predict with perfect certainty what the best performing asset class will be in the next twelve months. While we certainly favor some assets over others, and take advantage of market dislocations, we build portfolios that participate in the upside of equities when an investor is young and take risk off in the years that immediately precede retirement. Rather than construct a glidepath that dictates allocations to specific asset classes over a person’s life, we think of the split between return-generating and defensive asset classes. Over time this gives us much more flexibility to move between asset classes within those two buckets as one asset class’ attractiveness to another changes.

A binding constraint of our investment approach is to construct a portfolio with an expected risk in line or less than that of our public benchmark. This provides a framework to think about the risks we are taking in our portfolios to help generate the best possible outcome for an investor.

Touching on Europe specifically, how do you see the ECB’s mimicking of the quantitative easing playbook impacting the economies across the continent?

While some investors saw many positives from the recent announcement of quantitative easing by the ECB, some investors were surprised by the lack of content and specific actions that the ECB would take. While quantitative easing is likely to be a positive for the eurozone, it’s important to remember that quantitative easing is being reintroduced to Europe for a reason. The economic data in Europe is just not that robust right now. Also, there are implications of the upcoming ECB Asset Quality Review that could impact the Eurozone more broadly.

An important consideration the ECB is likely looking at now with regard to further QE is the euro’s currency depreciation this year. The euro is down approximately 9% versus the dollar since its peak this year. While the lower euro could support European equities in the short-term, it may signal the ECB may be more reluctant to do anything further than it has already announced. The euro depreciation may not be enough to put earnings revisions into positive territory and U.S. investors are continuing to divest away from European equities.

In regards to China, there is a consensus that the economy is set to implode. Do you agree with that? If so, how will the rest of Asia be impacted?

I disagree that China is set to implode but the economic data certainly support a continuing slowdown in China’s economy. To me it isn’t really important if China grows at 8%, or 6% or 4%. It is still one of the most rapidly growing countries in the world and it would not be healthy for the global economy if China continued to grow at double digit growth as it transitions to a domestic consumer economy. However, if there was a slow and sudden slowdown, or hard landing, in China the ramifications would be felt far further than just Asia. Major trading partners with China, like Australia and Europe would be affected as well as the US. Since the US is the strongest region in the world currently, economically, this could trigger a slowdown in the US which would be far more detrimental.

There tends to be a bias towards U.S. equities. Where else do you see opportunities that investors may be overlooking?

Many of the managers of target-date funds have a home bias towards U.S. equities. This certainly helped over the last few years but has not helped for longer periods. If you’re 29 or 30 years of age and you’re investing in a 2050 target-date fund, on average 59% of your fund is invested in US equities. I believe this is simply too high to achieve appropriate global diversification to smooth out the inevitable bumps in the market. The Allianz 2050 target-date fund has a 34% allocation to US equities which is much more reasonable and allows for a greater degree of diversification.

U.S. equities are currently trading at rich levels relative to their cyclically adjusted Shiller PE. We are seeing opportunities in areas such as frontier market equities which continue to grow at more rapid rates than developed and many emerging economies and are well positioned to benefit from demand for natural resources particularly from the BRICs. We also like short-duration high yield bonds, bank loans and global dividend yielding equities that cushion the downside when volatility spikes.

The Bottom Line

In the eyes of James Macey, target date funds are extremely important in the investment world. He also was able to give us an idea about international securities including the ECB’s policy and the growth in China.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions.

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