AmazonScience/document-haystack

1fund investors and the Group and are normally held to maturity. Similar to liquid seed 2investments, there are also instances where seed capital is provided to launch alternative 3funds.4Strategic investments: Strategic investments typically have the primary objective of 5enhancing the franchise value by providing access, for example, to specific markets, products 6or exchanges. A strategic investment, therefore, has a broader strategic business objective 7than making a return on the investment itself. 8The key risk inherent in our portfolio of co-, strategic and illiquid seed investments is the 9impact of an event on the value of the underlying assets potentially resulting in the need to 10partially impair or even fully write-off the value of an investment. Key events can include:11– Economic environment: Material economic downturn impacting the value of the 12underlying fund investments13– Geo-political risk: Material geo-political events impacting the value of underlying fund 14investments such as the US-China trade dispute or a political shift in willingness to support 15or subsidize certain industries such as the sustainability sector 16– Equity prices: Impact on underlying investments of a change in equity prices in turn 17impacting the value of the co-investment in the relevant funds18– Foreign exchange (FX): Impact on reported value of investments of movements in foreign 19currencies relative to Euro. 20– Interest rates: Impact of interest rate movements on funds invested in debt instruments 21and/or providing loans (e. g., private debt funds); wider, indirect impact of rising interest 22rates on investor appetite for investment in alternative funds23– Commodity prices: Impact on underlying investments of a change in commodity prices in 24turn impacting the value of investment in the relevant funds (e. g., real estate construction 25costs)26– Sustainability risk and adverse impact factors: Sustainability risk factors, including 27climate factors, may negatively impact investment fair value; investments may adversely 28affect the environment or have negative social impact29– Idiosyncratic risk: Market risk can also occur because of specific investment 30characteristics, for example operational leverage or, management quality, or fraud31Decreases in investment valuations directly impact our profits via reduction of fair value. In 32addition, fee income is negatively affected due to the lower asset value of the underlying 33fund. Furthermore, potential issues in current or future capital raising and/or reputational/34litigation risk may arise.35Guaranteed products: We manage guaranteed retirement accounts (“Riester Products”) and 36guaranteed funds, whereby we provide a full or partial notional guarantee at maturity. Riester 37guaranteed retirement accounts are voluntary private pension schemes in Germany that are 38government subsidized.39The guaranteed products portfolios are managed using constant proportion portfolio 40insurance strategies and techniques, which use a rule-based exposure allocation mechanism 41into highly rated assets and riskier assets, depending on market levels. This allocation 42mechanism between the two components is designed to limit the downside risk. Guaranteed 43products may invest into a wide range of equity and fixed income securities as well as other 44instruments permitted in the product documentation.45The risk for the Group as guarantor occurs if the net asset value of underlying funds at the 46respective guarantee date is less than the guaranteed amount. The respective guarantee 47shortfall is reflected as negative market values from derivative financial instruments. A 48provision is booked, aligned to the long-dated maturity of the underlying guarantees.49The guarantee shortfall is particularly sensitive to movements in the long-dated interest rate 50curves and can also fluctuate due to changes in:51— Market development: in addition to changes in long-dated interest rates, the shortfall is 52also impacted by changes in equity prices, volatility, and other market factors impacting the 53net asset value (e. g. performance of underlying assets and funds)54— Changes in client behaviour: e. g., decreases in cancellation rates increase the shortfall as 55do client contributions if made in a low interest rate environment56— Model assumptions: the shortfall calculation can be influenced by changes in model 57assumptions and the timing of the market data snapshot used58This risk is regularly monitored under different stress scenarios and client contribution and 59cancellation simulations. We mitigate interest rate risk as and when necessary to retain a 60balanced risk position in line with our risk appetite and strategic goals. The mitigating 61instruments include long-dated bonds, long-dated interest rate swaps or swap options.62Pension risk: We are exposed to market risk from several defined benefit pension schemes 63for past and current employees. The ability of the pension schemes to meet the projected 64pension payments is maintained through investments and ongoing plan contributions. Market 65risk can materialize due to a potential decline in the market value of the assets or an increase 66in the liability of each of the pension plans. Key risk factors include interest rates, inflation, 67credit spreads, and equity values. The overall risk increases with reduction in plan 68        69To our Shareholders Summarised 70Management Report71Consolidated 72Financial Statements Compensation Report Corporate Govern-73ance Statement74Supplementary 75Information DWS 2023 Annual Report76 77Risk Report7852 Financial Risk