Annual Asset Manager Conference 2022

KENFO-Segment Investment Committee Meetings

November 3-15, 2022

At the end of 2022, KENFO once again hosted its "Annual Asset Manager Conference." This year's presentations focused on inflation, geopolitics, token economics, and climate change mitigation while the UN Climate Change Conference (COP27) was taking place in Sharm-El-Sheikh.

The Annual Asset Manager Conference 2022 kicked off with Prof. Weber, former President of the Deutsche Bundesbank and Chairman of the Board of UBS. As a crisis-tested economist, Prof. Weber shared his perspective on current central bank policies, economic developments and predicting major challenges for central banks and investors currently and in the future. 

Drawing on his many years of experience, Prof. Weber drew comparisons to past crises which he witnessed and managed first-hand as President of the Bundesbank. Even if crises do not repeat themselves, they do rhyme. Prof. Weber sees the danger that central banks will fall into similar behavioral patterns of previous crises. As in the 2000s, the risks to the global economy are high and central banks run the risk of acting too late and falling behind the curve. For investors, this leads to the challenge of hedging in uncertain times and in a volatile market environment. Economically, Prof. Weber sees Europe in recession and the U.S. on the brink of recession. 

Against this background, Prof. Weber takes a critical view on central banks' current policies: they had maneuvered themselves into a major dilemma by making monetary policy mistakes. This could have been avoided, but the rising inflation trends were not adequately combated for a long time. Today's monetary policy has reacted too late and too extreme, which has had a destabilizing effect on the financial markets. As a result, there is a conflict between what is required in terms of monetary policy and what is feasible in terms of fiscal policy in order to do reach financial stability. The ECB's and the Fed's monetary policy allowed too much inflation in the past due to a misguided strategy. They had the mistaken belief that they could let it run for a while and then "couldn’t put the toothpaste back in the tube." In a way, they have allowed inflation to continue to shoot up beyond tolerable levels. And these price developments are affecting the poorest part of the population. 

For long-term investors, Prof. Weber sees global diversification as an effective instrument in this difficult environment. He warned to further correct the markets and sees "safe havens" in the dollar and Swiss franc in particular, as well as in German bonds.

At the end of his presentation, Prof. Weber looked at the geopolitical situation in conjunction with the green transformation, especially in the energy sector. Germany and Europe are currently facing two epicenters that flank economic uncertainties: Russia's war of aggression with effects on energy supply and China's advancing autocratization and its Covid strategy. In this context, Prof. Weber expressly warns against not pushing ahead with investments and efforts to achieve the green transformation and falling back into old structures.

In addition to geopolitical and macroeconomic issues, technological innovations and disruptive topics for the financial industry were also on the agenda of the Annual Asset Manager Conference 2022. Against this backdrop, Katharina Gehra, CEO & Co-Founder of Immutable Insight GmbH spoke on the function and benefits of tokens for the financial industry and economy. As an expert in Germany's digital finance industry, Katharina Gehra is a member of the "Digital Finance Forum" at the German Federal Ministry of Finance, where she represents the Blockchain working group. 

Her presentation focused on how the token economy will change the classic value chains of finance, banking services (incl. digital central bank currencies) and asset management, and how actors can profit from this development. It became clear that a wide variety of assets can be "tokenized" and complexities can be significantly reduced: "Similar to shipping containers, tokens wrap up and standardize a wide variety of assets and then transport the cargo overseas", Ms. Gehra figuratively summarized the heart of tokenization. She added that additional functions can be attached to these tokens - at significantly lower cost and with new revenue options. 
Ms. Gehra compared the development of the token economy with the early phase of the Internet: "At the beginning of the Internet, one said that there are telephone books after all and that you need computers for the Internet." The transformation to the token economy therefore means not only shaping technological progress, but also anchoring it in people's minds and dissolving existing barriers. It is therefore important to create analogies that already exist: while today, for example, websites for hotel bookings contain more information than analog hotel bookings in the pre-Internet era, in the future tokens will contain more content and added value than today's websites and apps. 

Particularly relevant for KENFO were questions about the extent to which tokens can reduce the complexity of processes, for example in payment activities or fund subscriptions. Ms. Gehra concluded her presentation with the prediction that in the future all portfolios and assets of institutional investors will exist on a token basis - from shares to real estate. This makes it even more important for investors to take advantage of this early phase of tokenization and to shape further developments.

With more than 40 years of experience in the private equity business, Steve Klinsky, founder and CEO of the private equity firm New Mountain Capital, is one of the most experienced and renowned experts on the asset class. Steve Klinsky, who has also been Chairman of the US private equity association, the American Investment Council, presented his view on how private equity works in general and gave an overview on current market conditions in the US.

According to Steve Klinsky, over the last 40 years, private equity has developed from a form of finance into a form of governance. While in the early days financial engineering was the main source of value creation, this is no longer best practice in the industry. If it is done right, as an asset class, private equity combines the advantages of shareholders, who are very close to their own company, such as family business shareholders, with all the strength of a large organization behind them. Steve Klinsky emphasized that private equity is a skills-based business where returns are ultimately driven by firm strategy, team, experience, and ability to add value. 

With regard to the current market conditions in the US, Steve Klinsky being experienced in facing difficult market conditions, believes that bad market situations create opportunities for attractive new investments. Even though Steve Klinsky deems that the Federal Reserve waited too long, it is acting now to keep inflation from becoming embedded. For the US, he sees the market rather in a “squeeze” not a “crash”. For private equity this means more equity defaults than before but for solid companies the effects should be manageable. In his view, Europe and the rest of the world are more structurally challenged for example due to the energy issues. Nevertheless, he concluded on an optimistic outlook for the years ahead, rooted in his trust in innovation and improvement. 

In an interview session, the former U.S. general and CIA chief General Petraeus shared his assessment of the situation following the military invasion of Russia in Ukraine and concerns of China’s current foreign policy. Moreover, as Partner at KKR and Chairman of the KKR Global Institute, he provided insights on how geopolitical risks should not be underestimated in strategic investment decisions.

General Petraeus’ assessment of Russia’s situation in the Ukraine war was clear and has been consistent since the beginning of the invasion: Russia expected to take Kiev and Ukraine swiftly, but Russia is losing on the battlefield and now finds itself in a situation where it can only react to Ukrainian actions rather than act. The sanctions imposed by the West may superficially not bite but have a long-term impact on the Russian economy and its people. In any case, an end to the conflict will ultimately only be achieved through successful negotiations between Ukraine and Russia once the parties are tired of war. Should Russia go for the ultimate escalation and use nuclear weapons he expects a strong reaction by the U.S. and her allies. 

Broadening the discussion to the situation in the far East, General Petraeus has no doubt that the U.S. cannot accept if China invades Taiwan. According to him, such a scenario should not be underestimated since the reunification with Taiwan seems to be a very possible signal to demonstrate and manifest China’s position of power in the Indo-Pacific region.

According to General Petraeus, especially current developments in China demonstrate that a consideration of geopolitical risks becomes increasingly important for investment decisions by Western investors. This is particularly true as all major Western companies have exposure to China where trade and investments become increasingly limited because of national security concerns. He further emphasized that global investors need to understand how they legally but also responsibly invest in countries that do not share the same standards for e.g. human rights and data protection. Generally speaking, reputational risk must not be underestimated and is a crucial issue for global investors.

Professor Lars-Hendrik Röller, economic, financial and energy policy advisor to former Chancellor Angela Merkel from 2011 to 2021 and Head of the Economic and Financial Department in the Federal Chancellery as well as G7 and G20 Sherpa, gave interesting insights into the work of one of the former Chancellor's closest advisors. 

The extent of Germany's dependence on Russia in energy matters had surprised even him. In Germany, gas from Russia was considered as a transition technology only. On the international stage, such as the G7 process of recent years, the focus had been on possible dependencies on China rather than Russia. Putin had never seemed irrational to him, it always seemed that he knew exactly what he wanted, but he had "totally" miscalculated with invading Ukraine, Prof. Röller said. 

However, a distinction needs to be made between Germany's dependencies: For example, the dependence of German automotive companies on Chinese sales markets is less critical. The much bigger problem are the so-called input markets, e.g. for critical raw materials such as rare earths elements, silicon, etc. The current and future deposits and markets have to be analyzed in detail. However, corresponding solutions are already being developed. Prof. Röller is concerned, that the EU is relying too much on "defensive instruments" of the domestic market, such as in public procurement. He sees the danger of isolation while the rest of the world continues to develop. 

The triad of cooperation (e.g. in climate issues), competition and systemic rivalry still applies to German-Chinese relations. Prof. Röller does not believe in "change through trade”. China needs to understand to play by the rules, not to threat its neighbors, to avoid conflicts and to jointly solve global problems. To do this, he said, it needs to be talked and negotiated with each other, but at the same time to assertively defend interests. Overall, he said, dependencies must be reduced through diversification, which is of particular relevance in input markets.

In regard to the transformation to climate neutrality, Prof. Röller relies on CO2 pricing in the area of mobility and buildings through Europeanized certificate trading, regulation, public funding - e.g. for charging infrastructure - and private investment. 

The Annual Asset Manager Conference 2022 ended with a presentation by Mr. Thallinger, Chairman of the UN-convened Net-Zero Asset Owner Alliance (NZAOA) and a member of the Board of Management of Allianz SE . Mr. Thallinger, who was recently appointed to a high-level United Nations Advisory Council on Accelerating Climate Action, explained the background of the need for sustainable investments, described the work of investors in the NZAOA, and gave insights into the UN Climate Change Conference (COP27), which was ongoing at the time of the presentation. 

The mathematician, who holds a PhD, emphasized that sustainability is not a purely qualitative concept that still needs to be shaped, but that very stable scientific knowledge exists on prevailing environmental and social boundaries. It is important to recognize these and to work towards ensuring that these boundaries, some of which have already been crossed are respected. For investors, financial service providers, and companies, it is important to use these findings and to act accordingly in order to remain competitive. 

The NZAOA, founded in 2019, is the most important association of international capital owners for achieving net-zero investment portfolios by 2050. With currently more than 80 members and 11 trillion US dollars in total assets under management, the NZAOA leads the way by having all members set interim targets for their portfolios for five annual periods after joining. This, he said, is particularly important and helpful on the path to the net-zero goal by 2050 and to engage directly in dialogue with invested companies. Disinvestment is therefore not the means of choice for the investor alliance. In addition to direct dialog with companies, efficiency improvements such as influencing asset managers and supporting regulation and standardization are indispensable. He described the annual progress report published by the alliance, which is supported by Principles for Responsible Investment (PRI) and the UN Finance Initiative of the Environment Program (UNEP FI), as unique. In addition, he said, the NZAOA continuously works to improve its target setting framework to include new asset classes, in trustful cooperation between members and non-governmental organizations, among others. Duties of the members also have consequences in case of non-compliance: If targets are missed, members have to leave the NZAOA; this is the only way to guarantee the basis of trust.

Finally, Mr. Thallinger shared his observations on COP27, saying that after years of commitment, the focus is now on accountability as well as transparency on measures already taken that are leading to change in the real economy.