In a speech to a conference in Bonn last October, Joachim Faber said: "I firmly believe that capital markets are the only sustainable solution for the most urgent societal problems that we face today." As Faber is CEO of Allianz Global Investors (AGI), the asset management division of German insurance giant Allianz, it would not have surprised delegates to hear him talking enthusiastically about the markets. But this was bordering on the evangelical.
Today, some five months after the Bonn speech, we're sitting in a meeting room at AGI's global headquarters in Munich, a small, hushed and immaculate building situated a few miles away from Allianz's group HQ in the centre of town. A highly educated man, Faber might be expected to be scholarly and sober. He is all of these things, but he also has the habit of talking about his role at Allianz with the excitement of a child who finds himself appointed chief taster in a chocolate factory.
I ask him what he meant by that speech. He says he was mainly talking about pensions - the issue of how to provide for the continent's ageing population in three or four decades' time is "a much, much bigger problem than anybody comprehends at the moment", he says. "If you assume that in Germany, France, the US and the UK, government social security systems will remain unchanged in benefits and contributions, you will see the debt in public budgets grow to such an extent that the government bonds of those countries will reach junk bond status - below triple-B rating - between 2026 and 2033."
The obvious solution is to use the capital markets to generate higher returns for pension funds, he says. But he worries that Europe's weak equity culture prevents this from happening. "There has been a flow from equities into fixed-income bonds, which obviously takes away the risk for those who worry about the volatility of the capital markets," he says. "But if market theory is correct, equities should out-perform fixed-incomes in the long run. And we urgently need this additional performance to finance the annuities and pensions of future generations." The traditional reliance on government-provided pensions has created a generation of state dependents with little sense of personal responsibility for their own retirement, poor understanding of the power of the markets and a blithe ignorance of the problems they will face in later life, says Faber.
In this, as in so many other things, Europe compares badly with the US. "If you talk to any taxi driver in the US, you can have an educated discussion about the proper allocation of equity versus bonds and how his portfolio is doing. If you try to have the same conversation with a taxi driver in Frankfurt or London, the outcome will be very different. There is a much higher understanding of risk and reward in the US - people accept the volatility and higher risks of equities because they know they will get higher returns in the long run."
Faber's good spirits today are probably due in part to the 2006 results Allianz posted in January. The group (of which Faber is a board member) announced operating profits of EUR10.4 billion - a rise of 14% - of which EUR1.3 billion came from AGI. As Allianz's core business is insurance, where a freak storm or bomb explosion can wipe out profits overnight, good news like this is never guaranteed and is to be savoured.
And yet just a few years ago, the atmosphere was very different. In 2003, when current group CEO Michael Diekmann took up his role, Allianz was in its deepest crisis since the second world war. The company's insurance business had been hit hard by a series of natural disasters and terrorist attacks, its assets were shrunk by the previous year's slump in equity markets, and its newly acquired Dresdner Bank was a mess. Allianz posted a EUR1.2 billion loss for 2002, leading many analysts to question whether the company had a future at all.
Its subsequent comeback owes something to good fortune. Fewer hurricanes and a sharp rise in capital markets have boosted earnings to record levels. Rising markets generate higher premiums and direct more funds to asset managers, as well as increasing demand for savings products. But Faber insists that Allianz's improved performance is also due to the company's efforts to improve the management of its three divisions - insurance, banking and asset management.
"We've been engaged in a sustainability programme for the past three or four years," he says. "For example, our various insurance companies in different countries, which were basically independent silos that didn't share best practice, have been forced to work together much more closely, which has saved a lot of money and increased their effectiveness. Now we have an insurance division made up of different companies working together."
Allianz's banking division was essentially created in 2001 through the purchase of Dresdner Bank. The move was intended to reposition Allianz as a bancassurance company that would sell insurance and banking products to the same customers. But very quickly the acquisition appeared to be a huge mistake: Dresdner contributed almost EUR740 million to Allianz's record third-quarter 2002 loss of EUR1.9 billion, with a bad loan provision of EUR1.3 billion. In January, however, Dresdner posted operating profits of EUR946 million for 2006. "The bank is really coming together," says Faber. "A lot of the inefficiencies from the time of the acquisition are now out of the way and it has really improved its standards."
AGI, Faber's own division, was formed in 2000. The only division of the Allianz group to have performed consistently well over the past few years, AGI is credited by some for keeping the company afloat. Unsurprisingly, Faber is bullish about the company he has run since day one: "Over the last five years, we have registered an average annual growth rate of 27%, including last year." The secret, he says, is AGI's focus on empowering portfolio managers to improve investment performance. "A portfolio manager who spends all his time off-site or on training courses isn't spending his time very well. To create good investment performance, he needs to spend his time thinking about and analysing markets."
Faber describes AGI's structure as a "family of boutiques", made up of a range of different investment houses, all of which are encouraged to develop individual styles and approaches. The advantage of this, he says, is that it preserves the investment culture of each company. "We have seen so many global integrations of asset management companies that failed because they tried to centrally manage investment thinking, which doesn't work. It's our clear and firm belief that you can have real creativity only in smaller entities with a preserved investment process and culture. It creates opportunities for management to do what it is supposed to do - manage."
But despite its self-styled laid-back approach to parenting, Allianz is also keen to encourage greater use of the family name. This will partly be achieved by rebranding parts of the company with the Allianz moniker. "In the future, whenever it is possible and sensible, we will use the name Allianz," says Faber. "But in cases such as Pimco, which is better known in the US than Allianz, we will continue to use the old name."
The second part of its strategy is its sponsorship of the US BMW Oracle team in the Americas Cup, which is being held in Spain this summer. "As a European company with aspirations in America, the event gave us a perfect opportunity to make that bridge between the two geographies." The choice of the Americas Cup is an interesting one. Although sponsorship of a sailing event will undoubtedly help Allianz to reach high-worth clients, it will surely do little to help spread the gospel among savers and investors of more modest means - those taxi-driving portfolio holders of whom Faber is so fond.
I wonder aloud whether Allianz has calculated exactly what it expects to gain from the deal. "Well, anybody who tells you that you can get immediate benefit from sponsoring, and shows you by the dollar how much, is not telling the entire truth," says Faber. "It's a very difficult thing to substantiate. But there are no other major sporting events this summer, so there is a big opportunity - though it really depends on how much media attention it gets."
Born in 1950, Faber studied law at Bonn University before gaining a doctorate at the University of Administrative Services in Speyer, which included a spell of research at the Sorbonne in Paris. As a student, he was a member of a successful rowing eight that won a national title. But despite no longer competing ("I'm not such a good team player any more - I go out on my own in a skiff"), he still believes in the power of sport to motivate and empower. "I think you can gain a lot out of being physically almost dead, but having to keep going," he says. "That can help you in your professional life."
His first job after leaving university in 1983 was at Citicorp. "It was at Citicorp that I first became interested in capital markets," he says. "I started out in project finance, then after a year or two I became responsible for derivatives trading, foreign exchange trading and bond trading. After that, I ran the European capital markets department, then later expanded that into America and Japan."
He joined Allianz in 1997 when the company approached him to help it expand into non-insurance financial services. He first created a private equity division, followed by Allianz's first asset management business. Then followed the series of acquisitions - Pimco, Nicholas-Applegate and Dresdner. Now that Allianz is clear of its earlier difficulties, Faber might be expected to move on to other things. But if he has any such plans, he is keeping quiet. "I'm very happy to stay in the company and take AGI into a world-class, leading position. I believe that as asset managers and life insurers, we can play a major role in providing the right individual pension solutions and retirement products. We can do a lot of good for our shareholders, a lot of good for our clients and a lot of good for our own people."
We're back to the idea that finance should improve the world, as well as make people rich. It isn't just through pensions that Faber believes this can be achieved; he also wants capital markets to take the lead in tackling climate change. "The markets provide the equity and debt needed to fund renewable energy projects. Those companies would never be able to grow at the rate they do if the capital markets weren't so willing to provide money for future technology.
"I think we in the capital markets can do a lot to ensure that the consciousness of companies around the world is more focused on the link between CO2 emissions and global warming." This isn't about nourishing the "green dreams" of CSR departments, he says: companies must understand that unless climate change is tackled soon, their financial performance will take as much of a hit as their reputation.
The notion that investment houses will be the eco-warriors of the future is an attractive one, but seems a little naive. Even if portfolio managers accept the link between mankind's activities and the heating up of the planet, persuading them to change their investment decisions accordingly will be a different matter entirely - especially given the huge returns that some investors are beginning to accrue in the emerging markets, where addressing environmental concerns ranks about as highly on the average company's list of priorities as funding space travel. But Faber is adamant. "Look, if you ask me if the markets are as forceful as they could be on this, then I say, of course they aren't. But I'm very encouraged by the fact that EcoTrend, a fund we launched less than a year ago, has sold out already and is performing very well."
The benign view that Faber presents of global finance extends even as far as private equity, placing him firmly against the prevailing climate of fear and hostility that surrounds the secretive, cash-heavy and increasingly bold groups of investors. Private equity, he says, is a "driver of change, a driver of higher professionalism and a driver of growth - the number of jobs created by private equity firms far exceeds the number of jobs cut by them".
Does this mean that Faber rejects the view that some private equity firms are little more than "amoral asset-strippers after a quick buck", as UK Trade Unions Congress general secretary Brendan Barber called them? "Well, I think one should not be blue-eyed about it - certain things have happened that have been very short-sighted," he says. "The more liquidity flows into private equity, the hotter the money gets and the less controllable the direction becomes. My main criticism of private equity is that it is not able to cope with the amount of money it is getting from investors - but that doesn't alter the benefits that it can bring to corporate structures."
It's clear that Faber's belief in finance as a driver of social change owes less to altruism than to a kind of benevolent rationalism - a deep belief that international capital, left to do what it does best, will generate healthier, stronger economies and happier, more prosperous people. Karl Marx, another highly educated German, argued that left to its own devices, capitalism would eventually commit suicide. On the available evidence, Faber looks more likely to be right, though not everybody will share his faith in the ability of capital markets to solve the world's most pressing social problems.
But in the harsh and exacting world of international finance, a little bit of faith is probably not a bad thing.
- Interview by Nick Loney
WHO IS JOACHIM FABER?
1950: Born in Gieden, Germany
1983: Doctorate, University of Administrative Sciences, Speyer
1983: Joins Citicorp
1995: Head of capital market business, Europe, North America and Japan,
1997: CFO and member of board of management, Allianz Versicherungs
2000: CEO, Allianz Global Investors
2006: Member of board of management, Allianz