Unprecedented economic challenges have forced central banks across the globe to rethink previously held assumptions about what’s possible in terms of policy and, in economies tied down by stagnant growth and rising unemployment, policymakers are courting negative interest rates as a fix. Used in only a handful of instances and seen largely as a last ditch attempt to fend off spiralling deflation and joblessness, negative rates have cropped up across Europe recently and threaten to do so elsewhere if circumstances permit.

Though the policy tool has proven increasingly popular of late, as shown in Switzerland, Sweden and Denmark, it has not yet shown itself to be a success. Since the measure was first introduced in the late 19th century, interest in the subject has been almost wholly academic, and its practical application marks a real turning point for previously held assumptions about monetary policy. What’s arguably more significant is the importance of negative rates in highlighting the severity of the situation currently facing Europe, and in revealing the ineffectiveness of conventional policy tools in the matter.

“Low nominal interest rates are here to stay in economies afflicted by low growth prospects”, says Pierre Cailleteau, Head of Institutional Clients and Sovereign Entities at asset management firm Amundi. “They could move into negative territory as we have seen in different places in Europe, though such a situation reflects more of a temporary supply and demand imbalance than disastrous economic prospects. This situation is challenging financial intermediaries and institutions that have guaranteed elevated returns to their clients (pension funds, insurance companies, etc.). Naturally asset managers also have to cope with such a challenging situation.”

Negative territory
Whereas the ‘zero-bound’ thesis stipulates that interest rates cannot slip into negative territory, the adoption of negative rates is doing much to discredit the theory. In April, one quarter of the European sovereign bond market was trading with a negative nominal yield, and the same can be said for a growing, albeit small, segment of corporate bonds.

Whether critics care to admit it or not, negative rates have fast become a fixture of the modern day financial landscape, and will likely continue to crop up for as long as the situation endures.

“A prolonged phase of economic stagnation has obviously many negative implications”, says Cailleteau, who acknowledges that engagement with the policy is a consequence of dismal economic showings. “To mention three that are especially worrying: a sizeable part of the population is unemployed (see Fig. 1); commitments in terms of fixed rates of return on capital are starting to weaken the solvency of financial intermediaries; debt dynamics are made more complicated even as the generation of revenues to repay or simply sustain debt is weakened.”

In the eurozone, a prolonged debt crisis has inflicted major pains on member nations, as the currency area struggles to mount a credible recovery bid, more than five years on from when the crisis first struck. Worse still is that a sustained period of lacklustre growth has made businesses and households wary when it comes to spending. Confidence in this area will return only once the recovery gains traction. Committing first to austerity and record low interest rates, member nations have lately begun to consider negative rates, much to the dismay of the asset management business.

Far from excluded to citizens in affected countries, the prevailing low and negative interest rate environment has asked that asset managers, much like Amundi, keep close tabs on market movements, if only to minimise damages and guard against further price shocks. Naturally, close-to-zero and negative interest rates mean that managers must indulge in additional risk-taking, though doing so means they have a responsibility to educate clients about the situation at hand and how it might affect them.

Risk and return
“At Amundi, we believe that the first place to start is for our clients to clarify how much return they are prepared to chase against how much risk. And this, in a context where more risk must be taken to get the same return”, says Cailleteau. “Once this is made clear, several options are available: expanding the range of credit-sensitive assets, taking duration risk and being prepared to make concessions in terms of capital availability (illiquid space). But one favourite option is to take broader international exposures, which of course requires that we handle FX risk appropriately.”

As Europe’s leading name in the asset management business, measured in terms of assets – of which it has more than €950bn ($1.05trn) under management – Amundi also qualifies as one of the top 10 largest firms worldwide. Recognised for product performance and transparency, a long-term advisory approach, organisational efficiency and a commitment to sustainable development, the firm has made a name for itself as a successful and responsible enterprise.

Having built up a retail client base of 100 million and an institutional client base of over 2,000, Amundi designs “innovative, high-performing products for institutional clients, which are tailored specifically to their requirements and risk profile”. With a presence in over 30 countries, Amundi has done much to keep pace with a global financial market transformed from that of a few years ago.

The low and negative interest rate environment, for example, has done a lot to upend the operating environment for banks, and taking a tumble into negative territory any further could fundamentally alter the operating environment for financial services as a whole. For investors, meanwhile, the choices are quite simple: on boarding more risk, saving more or reducing expectations. The challenge lies more so with asset managers, who must work alongside clients to ensure that they understand this to be the case.

“Getting higher returns in next-to-zero interest rates involves some degree of additional risk-taking. So there is no magic here. These assets are more risky taken separately than conventional bond or cash management strategies. We argue that broadening one’s portfolio to such assets in a transparent and well-structured way adds value – and can even add value for a limited quantum of additional risk”, says Cailleteau.

Multiple strategies
If only to acclimatise to this much-changed economic environment, asset managers must make available a variety of funds, tailored to the prevailing low and negative interest rate environment of today and geared to suit various risk appetites. “Amundi is the leader in the euro fixed-income and credit space, but prides itself for offering a range of product/strategies to its clients, from liquid to illiquid, active to passive, European to global”, says Cailleteau. “So what matters to us is to bring the type of funds/strategies that fit our clients’ needs.”

Speaking also on what trends he has detected recently, Cailleteau says that global aggregate bond strategies have been very much in favour, just like multi-asset strategies that fit their clients’ risk adjusted return objectives. “We offer our eagerness to understand the challenges they face, our ability to offer tailor-made strategies and the benefit of entrusting their funds in a company that is robust financially and cares about client service.”

In answer to the question of what sets Amundi apart from rival global asset managers like them, Cailleteau says: “We are a European leader with a global reach; our breadth of expertise makes us no captive of any strategy, fund or asset class. We sell our clients what fits their needs; and we genuinely care about socially responsible investment and act accordingly – yet in a constructive and not prescriptive way.”

What’s clear when it comes to Amundi’s strategy is that clients are factored into every step of the decision-making process, and the firm has developed a reputation for promoting responsible finance that is respectful of human values. “Our approach is to engage our clients on their investment challenges and see how we can mobilise intellectual capital, fund management expertise and operational excellence to build solutions.” By incorporating environmental, social and corporate governance into all of its investment criteria and keeping the client front and centre of all its dealings, Amundi has come to be seen as a responsible corporate citizen, evolving as a company to meet changing client needs in an economically volatile environment.

“We spend a lot of time speaking to our clients and thinking about the challenges they face”, says Cailleteau. “Then we offer ideas, insights and solutions. Some of our clients reward us through partnership type of transaction.”

In a period in which European central banks are struggling to keep the recovery moving, by working closely with clients to reassure them about the risks they face in a negative interest rate environment, Amundi has cemented its status as one of the world’s leading asset managers.