While many Asian institutions have a lot of room for increasing their offshore allocations, those in Taiwan are already heavily invested overseas and must seek riskier assets if they are to boost returns.
Two cases in point are the country’s biggest life insurer, Cathay Life, and the state-run Bureau of Labor Funds (BLF). Senior executives from each organisation outlined how they were coping with the challenge at a AsianInvestor forum.
Labor Pension Fund and Labor Retirement Fund, the two funds managed by the BLF with NT$2.2 trillion ($68 billion) under management as of end-January, plan to double their overseas alternatives investments to 10% of its overall portfolio by end-2016 from around 5% as of January, said Chiu Shean-Bii, consultant and board member of the monitoring committee of the BLF.
Chiu, also professor of finance at National Taiwan University, was speaking at the Taiwan Global Investment Forum in Taipei last week.
The BLF targets a five-year rolling average return higher than the two-year fixed-deposit rate plus inflation. Under the current environment, that means 2%-3% annual return, he said.
To hit investment targets these days, investors need to take risk, whether in equity markets or international investments, he noted, and the international return-risk profile is much better than for domestic assets.
Taiwanese investors should be braver in trying new things, said Chiu. “Taiwan people are conservative. They do a lot of preparation work, but only take tiny steps.” For example, BLF itself only decided to go into alternative investments after having more than 500 meetings with asset managers.
“I always say you cannot learn anything unless you do it,” said Chiu. “Learning while doing is the best way.”
LPF and LRF's move to boost their alternatives allocation comes as part of BLF's plan to boost the overseas exposure of its funds to 50% by end of the year. That compares with 45% as of the end of January this year and 22% in 2008.
Meanwhile, Cathay Life, with NT$4.6 trillion in AUM, has an even bigger offshore allocation of 57%, though some 90% of that is in fixed income. It has extended its investment scope from government bonds to corporate bonds and mortgage-backed securities, and in the process accepted a fall in the credit ratings of some of its assets drop from AAA to AA, said chief investment officer Sophia Cheng, speaking on the same panel as Chiu.
Moreover, Cathay Financial Holdings – Cathay Life’s parent – said in mid-March it planned to add NT$150 billion in overseas investments this year, including securities and real estate.
Cheng was open about how hard it is to “find a comfort zone between risk and return”, particularly amid the current global volatility. “We run scared every day,” she added.
Detecting the next investment trend ahead of global allocators such as mutual funds and other insurers is crucial, she said. “It’s like [piloting] an aircraft carrier: the bigger the asset size, the more difficult it is to change direction.”
It was easy to achieve decent returns back in 1997, when the deposit rate in Taiwan was 7%, noted Cheng, but as the rate has fallen, domestic life insurers have had to raise their overseas allocations from around 4% to more than 50%.
Such moves have helped boost performance. Last year returns for Cathay Life’s overseas investments were 8.1% for equities and 4.9% for bonds before hedging costs, compared with 7.5% for domestic equity and 2.1% for domestic bonds.
Generally Cathay Life prefers assets with stable, recurring yields, such as treasuries, high-quality corporate bonds and blue-chip stocks that offer long-term and stable dividends, such as those in the utility and telecommunications sectors.