Their risk budget, or the maximum of annual volatility they accept for their portfolios, has increased from approximately 3-6% in the period between 2002 and 2012 to more than 9% in 2014 and 2015. Union Investment assumes the low yield environment is the main reason for the increased risk acceptance of risk. Over the past couple of years, government bond prices have become more volatile, prompting a need for higher risk budgets.
Germans think short-term
As Expert Investor reported earlier, German institutional investors tend to be much more short-termist in their investment thinking than most of their European counterparts. It appears they decrease their risk budget considerably in years that follow negative returns from their investment portfolios. The only years Union Investment’s clients lowered the accepted volatility of their portfolios was in 2003, 2009 and 2012; the years after their portfolios had suffered significant losses. In all the other years, they made positive returns and consequently increased their risk budgets.
This is exactly the wrong thing to do, believes Thomas Bossert, portfolio management director at Union Investment, because it makes it less likely they can take part in the recovery that usually follows a bear market. “These investors could considerably increase their return per unit of risk, if they didn’t cut their risk budgets after bad investment years. Instead, they should act counter-cyclically,” he said.