Many investors woke up today with an 8% drop in share price for Allianz. In this article I will briefly explain you why, because some of you have reached out to me with questions about it.

Hence, I believe you might find this article helpful, especially if you want to initiate a position in the company.

Allianz ad-hoc Press release

Allianz price drop can simply be explained by their press release from this morning.

The company released that the US department of justice has started an investigation regarding their Structured Alpha Funds.

Such news is never good for the share price, because the US department of justice is never fooling around.

But what scared institutitional investors the most is the following quote:

In light of the DOJ investigation and based on information available to Allianz as of today, the Board of Management of Allianz SE has reassessed the matter and has come to the conclusion that there is a relevant risk that the matters relating to the Structured Alpha Funds could materially impact future financial results of Allianz Group.

However, it is currently neither feasible to predict how the SEC and DOJ investigations and the pending court proceedings may be resolved nor the timing of any such resolution. It is in particular not feasible to reliably estimate the amount of any possible resolution including potential fines. Therefore, no provision has been recognized at the current stage.

This means in layman’s terms that they know they screwed up.

Hence, they send out a press release to inform the investors about a potentially large fine in the not too distant future.

In itself this topic is not new, because the Security and Exchange Commission already announced an investigation in 2020.

However, something troubling must have been found which led them to believe that the department of justice needs to be involved.

Unfortunately Allianz is not clear about the exact reasons on their investor relations website.

What are the Structured Alpha Funds and what’s going wrong here?

Structured Alpha Funds are funds which several institutional investors bought, i.e. for their retirees.

Last year the funds saw a really big price drop for the fund as can be seen below:

Nobody likes to see such a price chart and neither when you’re in the midst of a pandemic. Seeing your valued wiped-out by half is just insance.

One of the vocal “victims” about this is the Arkansas Teacher Retirement System, because it accused Allianz of reckless behavior:

Arkansas Teacher Retirement System claims that Alpha Funds, investment vehicles marketed by AllianzGI, had placed bets against an escalation of market volatility in an effort to recover losses they incurred from the same strategy in February.

AllianzGI was effectively selling expensive insurance to other investors seeking to protect themselves from large market swings,” according to the suit filed in the Southern District of New York. “This strategy — undertaken with the assets of ATRS in the Alpha Funds — was a gamble that the expected market tsunami would turn out to be a drizzle. Source: FT.com

If this is true, then Allianz deserves to be punished for this. Speculation with such funds is not as per their policies and should be avoided at all times.

Hence, this just sounds like very poor risk-management, which is a weak sign of management.

Should investors be worried about this and the Allianz share price drop?

Honestly saying, I don’t think so if you are a long-term investor and I’m basing this on past experience.

What I get worried about is fraud and this doesn’t seem to be the case here.

However, what happened here are usually one-off events and these can be settled relatively easy with the victims. This leads then to one-off losses in one of the upcoming income statements.

So let’s assume that it will cost them about 3 billion USD to settle the case with all their clients (the Teacher Retirement System referred to 800 mln).

This would mean that they will turn a loss in a certain quarter this year or next year. As you can see, net income in Q1 2021 was 2.6 billion Euro.

Therefore they will likely take this as a one-off and exclude it from their earnings.

This will neither put a big dent into their balance sheet, because their solvency ratio looks healthy.

Hence, all in all we will be almost forgotten about this in 1 or 2 years from now if management acts swiftly and settles the case.

Otherwise it has the risk to become a RoundUp / Bayer story and nobody will be happy with that.

Summing it up and what happened to me after Allianz price drop

This Allianz share price drop might feel scary to many investors.

I have done my due diligence today and I don’t think I should run for the hills with this news.

It’s rather an opportunity to buy for me, put them on the shelves and collect the dividends going forward.

And truth to be told, this morning I initiated a position in Allianz @ 200 Euro per share.

It was more luck than wisdom, because I had placed a buy order more than a month ago. It finally got triggered and I am now a happy shareholder.

This does give me some mixed feelings though, because it smells like typical banking behavior. I don’t like that and I want to see Allianz fix this as soon as possible.

That’s why I will continue following this case, but at the same time I might buy more if Allianz share price keeps dropping (i.e. @ 180 Euro per share).

I even believe that this company might be a future European Dividend Aristocrat.

Yours Truly,

European Dividend Growth Investor

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