“Even The Germans Are Buying”
25 years ago, I lived in London and worked at Bloomberg. In managing accounts and visiting clients I got to meet people from every part of the financial markets.
My mentor was a former Deutsche Bank bond trader. I was on the Belgian and Luxembourg sales team for the first couple of years, so it was important to have some understanding of what the clients were interested in.
The vast majority held large portfolios of bonds. The entire system was devoted to bonds and credit. Equity allocations were practically nonexistent.
The firms had a dalliance with IPO investing at the end of the 1990s and were still licking their wounds in 2001 and 2002. They swore off equities and retired to the safety of bonds.
It worked. Bonds were in a secular bull market. Their performance was reliable. Relative to the decade of underperformance that was about to unfold in the equity markets, bonds were a safe bet.
That also means they missed out on the bull market of the last 16 years.
This is particularly important when viewed from the perspective of a bear market in bonds. Not only are investors missing out on equity returns, but they are also losing in their bond portfolios.
Germany’s decision to supplement the pension sector and change the range of investments deemed appropriate reflected that market reality.
Creating German equivalents of Trump accounts, expanding the allocations for private and institutional funds and boosting allocations to both equity and private credit suggest Germany is taking an aggressive approach in riskier investments.
In the late 1990s, many European investment firms came late to the IPO investing trend, went too big with positions, and blew up their clients’ accounts.
My former bond market colleague shared a quip from his days on the trading floor. “Even the Germans were buying”.
Historically, German asset managers have been very conservative. They regard their fiduciary responsibility as mitigating risk rather than boosting returns.
They have generally required a great deal of evidence to change their investment philosophy, which means they are inevitably going to be late to any new trend.
The global investment community is salivating at the thought of getting a piece of the German pension market.
The question German investors should be asking is what kind of value they are receiving when valuations are this high?
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