Insurance asset managers head to alternatives
22 October 2012
News, Asia, Global
By David Macfarlane
With a depressed economic outlook, it has been tough for insurance asset managers to find yield. Three of the main insurance players in Hong Kong tell Asia Asset Management about the asset classes that are providing the best returns at the moment.
Steve Sonlin, head of risk and capital management at Cathay Conning Asset Management (CCAM), says asset allocation should be based on carefully defined risk parameters, and insurers need to consider whether investing in specific assets fits with the long-term goals for their portfolio.
That said, according to him the following are some asset classes that CCAM feels are good options to consider as a means to generate additional yields in the current environment:
High dividend equities
Writing covered calls
High yield corporate bonds
Commercial mortgage loans
Working capital finance notes
Arnaud Mounier, regional chief investment officer at AXA Asia, claims that from an investment point of view, insurance companies have to investigate new opportunities to cope with these low yields but also have to maintain a rigorous discipline of being selective, as extra yield usually comes with a trade-off for either liquidity or complexity.
“For those reasons, we have been and we are still fairly positive on corporate bonds as long as we can build a well-diversified portfolio. Typically in the US, where most of our corporate bond portfolio is invested, the balance sheets of corporates are very healthy and spreads are definitely compensating for the credit and liquidity risks. In Asia, building a significant corporate bond portfolio is more challenging due to the limited supply of issuances in countries such as Thailand, Singapore or Malaysia, hence we are opportunistically considering offshore bonds for which we need to hedge the currency risk,” he says.
Equity markets continue to remain attractive, according to Mr. Mounier, especially versus government bonds. They are under-valued by historical standards, although he adds that the current drop in volatility seems a bit excessive if we consider the macro risks mentioned above. “As a matter of fact, we are reducing our exposure to equity over time and increasing our exposure to alternative investments, in the broad sense of the term (i.e., hedge funds, private equity and real estate).
“By having access to the right sourcing and management capabilities, we think that these asset classes will deliver attractive returns, with moderate correlations to traditional bonds and equity markets,” he notes.
Over the last couple of years the race for yield has intensified, as has the race for diversification, points out Patrice Conxicoeur, director, head of institutional business, Asia Pacific, HSBC Global Asset Management. This means there has been an increased appetite for corporate spreads, be they investment grade or sub-investment grade, and emerging market debt spread. On the emerging market debt side there’s almost a typical cycle, which starts with hard currency sovereign then shifts to local currency sovereign before moving on to corporates, hard currency and local currency.
“There’s another drive, which is towards alternatives,” says Mr. Conxicoeur. “As opposed to buying into corporate spread or emerging debt spread where you’re fundamentally buying into beta, with alternatives you’re buying into skill. Finding people who have the right skill-set to deliver the returns you want can be a difficult task.”
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