AXA Hong Kong will invest almost $1.4 billion in alternative assets in 2022, or about two-thirds of the new investments it will be making this year, with energy transition being a major theme for the life insurer.
The company’s strong hedging portfolio enables it to take on more risks for higher returns while keeping solvency at a healthy level, Richard Chan, AXA Hong Kong chief investment officer and head of asset-liability management (ALM) for Asia, told AsianInvestor in an exclusive interview.
The company has $25 billion of assets under management (AUM) as of the end of March 2022 and a hedging portfolio of $20 billion, excluding foreign exchange hedges, he said. “It is our bread and butter… It’s a core element to shade our ALM and risk profile.”
AXA Hong Kong currently has about 70% of its AUM or $17.5 billion in fixed income. Of this amount, about 15% are in alternative credit, ranging from highly-rated AAA structured finance to single B mid-market loans. The rest goes into corporate bonds, with a small amount invested in government bonds as derivative collaterals.
As for the remaining 30% of AUM or $7.5 billion of growth assets, about one-third is in the private market. While there is no specific target for increasing the exposure to these assets, Chan says it is possible to raise the portion to 50% of the growth portfolio within the next five years.
The company also aims to increase growth assets and reduce fixed income assets as it changes its product mix, he said. “Over time, in line with the industrial trend, we are selling more and more of lower guarantee but higher upside participating product, which means we will shift more into growth assets.
In keeping with its strategy, AXA Hong Kong aims to invest over $400 million in alternative growth assets in 2022, which makes up 90% of the new investments allocated for growth assets.
It will deploy the remaining amount of over $900 million into alternative credit, or about half of the total allocation for fixed income investments in 2022.
In recent years, renewal premium has been increasing faster than the company’s commitment and capital call, said Chan, adding the new funds have been temporarily invested in stocks. But it will reinvest in alternative assets when its existing commitments become mature and capital calls are met, he said.
The life insurer is overweighting alternative credit under tightened credit spread. “Before corporate bonds spread becomes more reasonable and attractive, we'll be overweighting the alternative credit,” he said.
“Eventually as what we expect, Federal Reserve will taper, and European Central Bank will probably taper as well. Then we will have relatively more investment back to the normal corporate bonds.”
PRIORITISING ESG INVESTING
Environmental, social, and governance (ESG) investing will become a major theme for AXA's alternative investment strategy as it plans to invest in energy transition projects such as clean energy generation and energy storage and transmission, he said.
For example, it is optimistic about hydrogen as alternative clean energy that is more economical and environmentally friendly compared to solar energy. It is also ramping up investments in ESG-friendly real estate projects. Its asset management arm AXA Investment Managers recently invested in a forestry project in Australia.
“But of course, both hydrogen and forestry are just examples showing we move towards more clean and environmentally friendly sectors,” he said.
He expects the return from the forestry project to be between mid and low single-digit before leverage, which is similar to the returns from prime office buildings, he said. However, he expects double-digit returns from private equity investment, including infrastructure equity in the long term.
INCREASE REGIONAL BIAS
AXA Hong Kong's alternative investment is mostly deployed in the US and Europe, with a small stake in Asia.
However, as most of its customers are based in Hong Kong, the life insurer is also working with other entities in Japan or China, for example, to source a smaller-scale commitment to regional funds to build some domestic bias for its local clients. These regional funds can be both pan-Asia or country-specific, Chan said.
On the private market in China, he said the company generally believes in buyout opportunities. It is looking at the first-generation entrepreneurs in the 1980s in China, who are now reaching retirement age and looking to sell their business at a reasonable price.
These successful entrepreneurs want to modernise their business with new owners so that their scions can cash out and live comfortably, he said.
He will avoid investing in “controversial” residential real estate in China and focus on sectors that are supported by the government such as data centres, logistic facilities, and even life sciences in the future.
KEEP RISK AT BAY
As the Asia head of ALM, he strikes a balance between long-term risk-adjusted return and short-term solvency. “What we do on ALM is to try to make sure both goals can be met, which is very difficult because if you try to be more resilient on the solvency side, you may lose some upside by foregoing some investment risk.”
The company's current investment structure consists of two main portfolios. “We have the so-called participating fund which is mainly to support the long-term risk-adjusted return of policyholders and shareholders. But at the same time, we have a hedging overlay portfolio which is purely for the shareholder to manage the solvency balance sheet,” he said.
“By doing so, we will stabilise the balance sheet without jeopardising the long-term return potential,” he said.
He said the company’s solvency ratio has even improved slightly during the Covid pandemic. “So, at that time when everyone is worried about the economy, worried about their solvency and need to de-risk, we can re-risk, buy bonds and continue to hold listed equity and even wear more listed equities,” he said.
“With that, we are not worried about ramping up the alternative asset at all because we have such a good hedging strategy overlaying and specific to manage the balance sheet solvency ratio.”