A gradual economic slowdown and the possibility that the US Federal Reserve will cut rather than raise rates offers questions for many institutional investors, but particularly life insurers. And as Asia’s largest international insurance company, it’s a particular focus for AIA.
Mark Konyn, group chief investment officer of the $230 billion insurer, has to balance these macroeconomic concerns with the dynamics of each of the 18 markets in which it operates. Konyn and Liu Chunyen, CIO for Singapore and formerly AIA’s head of financial risk, sat down with AsianInvestor in Singapore to discuss the environment and how the race for private asset investing throws up its own challenges.
The following interview has been edited for brevity and clarity.
How are you dealing with the slowing global growth outlook and the tepid economic environment?
Mark Konyn: There is a feeling among some of the big sort of supranationals, the governments and various institutions to be cautious. Obviously we are coming through a period of sustained growth, particularly in the US and strong performances in capital markets and the longer that goes on, the more governments and central banks et cetera, the IMF and the World Bank feel an obligation to caution.
But what we are really focused here on long-term outcomes. I think it is all very well for those in positions of authority to be wise after markets have done well and economies have done well, but the real question all of us have is: ‘How do you invest going forward?’
It is not a question of don’t invest. You are continuing to accumulate savings from wealth and you need to allocate. That’s the real question that we are trying to answer here.
So yes, rates are low. Yes, by some measures valuations are stretched. But we have chosen an array of managers who are very comfortable in this type of environment. And you could have said the same thing at any point literally since the financial crisis. At any point since there have been concerns that rates are too low and markets are too stretched and you need to run for the hills. We haven’t seen that.
What we are working our way through is a new era in terms of economic fundamentals. So many [long-held] fundamentals no longer seem to work in the same ways. Places like the US seem to have solved the unemployment problem, for example. But while there is record low unemployment it’s only now, 10 years after the global financial crisis, that we are seeing wage growth.
So some of the fundamental relationships are no longer working the way we expect or the way they have in the past. The same is true as it permeates through investments.
The low-rate interest environment has prompted a renewed push towards private assets. How do you balance that with increasing valuations?
Konyn: There has clearly been a lot of interest in private assets and you have seen a lot of equity taken out of … public markets. There is a sense that public markets have been fully valued and there have been opportunities in private assets.
We follow this quite closely because we are investors in private assets. But I think there is a point of equalisation because there is a lot of dry powder out there in private assets. Private assets are fine but you give up a lot of benefits of governance that you have when you are looking at the public market and I'm not sure [that trade-off] has been fully understood. So I think there is a natural sort of equilibrium that we are seeing.
We will continue to follow very closely private debt and private equity. I think the challenges include what you are seeing in the UK today, where some mutual funds that have daily liquidity (needs have been) taking positions in basically private or illiquid underlying assets. And that is where you have got to be careful because transmission can be disrupted very quickly.
When things are fine you don't need to worry about withdrawals and access to capital, and you don't really have the problem. But liquidity is something you don't need until you need it. We need to be very careful about that component of private [investing] ... we are very, very careful in terms of private assets and about the liquidity question.
Are you looking at factor-based investing, and how it could be part of your investing plans?
Konyn: We are beginning that (factor-based investments). The allocation to that is modest, we are not going to give you a number.
The benefit of working in an insurance company is that we have a very long perspective. We do many things that we are quite patient about. It is not a business for us, rather a question of allocating our assets.
We do look at passive (investments) quite closely and it is part of an overall strategy. I don't think whether it is passive, yes or no, or a passive (investment strategy) at the expense of other things. Where it makes sense in order of getting the risk and the fee budget right, where we know we want to capture beta, we will do that. It just depends on the role it plays within a broader strategy, so we aren’t out there saying that passive is better than active or passive at the expense of other strategies. It is passive in the context of the overall strategy.
How will the new risk-based capital rules, effective January 2020, affect AIA in Singapore?
Liu Chunyen: The obvious thing is that on the investment side [in Singapore], the equity charges will become almost double, if not triple.
And there are more prescribed credit risk charges for different ratings of bonds so we think that of asset charges becoming more expensive. But at the same time I think the MAS (Monetary Authority of Singapore) is encouraging investors and insurance companies to have good asset-liability management.
So for the part of the liability which is the product side, if you have proper assets to support it, there is [the option] to offset capital charges so even though the asset charges will increase, there are a lot of benefits you can recognise if you do asset-liability matching better. So overall, you can think of MAS trying to encourage companies to do better matching [assets and liabilities].