Cathay Life, Taiwan's biggest life insurer, had NT$4.89 trillion ($156 billion) under management as of September 2016.
Under Joseph Wang, chief investment officer and senior executive vice president, Cathay Life had 82% of its assets under management in fixed income, real estate, mortgages and policy loans as of September 30. Foreign investment comprise a big portion of this, with 52.5% of its total portfolio in foreign bonds (up from 49% a year ago).
Cathay Life, which won AsianInvestor's 2016 Institutional Excellence Award for Taiwan in November, is seeking managers for global absolute-return bond mandates.
Wang, who oversees a 200-strong team, spoke to AsianInvestor about his focus and outlook for the coming year. The full interview appears in the forthcoming February/March issue of AsianInvestor magazine.
Q How do you view the global economy at present?
A We are in the ninth year [of economic recovery] since the global financial crisis broke out in 2007. That’s a long time, historically speaking, with sometimes such a cycle ending in five years. It has lasted so long because of a longer period of lower rate environment and slow global economic growth.
We think the recovery will extend into 2017, and see growth-driven asset classes such as equity will bolster good opportunities.
Of course there are risks, mainly in politics and geopolitics. For politics, we see the policy execution of the new US president Donald Trump. The markets have priced for both the positive, such as the pro-growth measures, and negative, such as the trade barrier calls [which include proposals for a border adjustment tax]. We’ll keep nimble and flexible to adapt to the new president’s policy changes.
For geopolitical risks we’ll keep an eye on US-China and US-Russia relations. But we don’t think it’s likely a US-China trade war will occur. China is likely to retaliate if US sparks a trade war, and that would lead to a lose-lose situation.
Q What is your investment focus in this environment?
A We’ll focus on the bottom-up approach. In the late [economic] cycle you have to differentiate winners and losers, and the investment’s underlying target is extremely important, either for equity or fixed income. The selected company must have long-term secular growth going forward.
We will avoid firms that are less competitive and are likely to be disrupted. For example, the first question we ask in the consumer space is whether the company’s business model will be disrupted by [US online retail giant] Amazon.
Q What about your equity investment strategy?
A In overseas markets, most of our targets are listed in the US, some in Japan and fewer in Europe.
The sectors we are long-term positive on are information technology, consumer and healthcare. In the IT space we focus on companies that are disruptive to other industries. For example, we bought the shares in artificial intelligence semi-conductor chipmaker Nvidia last year, when it traded at about $20. It outperformed the IT sector and returned over 200% to us before the end of 2016.
For consumer, we look at firms that are immune from the Amazon’s massive disruptive power and meet the needs of human beings, such as those controlling the upstream of the dairy industry. We also like the healthcare industry because of the long-term trend of ageing populations.
Q What is your strategy in bond markets?
A We like and will continue to buy US credits and corporate bonds. If Trump really offers tax incentives for international companies to repatriate their capital many won’t need to issue new bonds, which they previously did to help support capital expenditure. If the supply of US credits goes down it would lead to rising bond prices and a further tightening in spreads.
For high-yield bonds, we think it’s time to sell if yields drop below 6% and a good time to buy when they hit 7% or 8%. We are also continuing to buy government bonds, partly for trading and partly for protection.
In harsh scenarios, US Treasuries are a very good tool to protect other asset classes, so it has strategic importance in our overall portfolio. In particular, 30-year US Treasuries yielding above 3% and 10-year US Treasuries nearly 2.5% are very attractive. We also have about 10% of our bond portfolio in emerging-market debt.
Q What alternatives has Cathay Life invested in?
A Alternatives account for about 1.5% of our total portfolio. In the past year or two the valuation of buyout funds was stretched, so we focused more on specific strategies such as distressed debt, real estate and infrastructure private equity funds, which provide stable cash yields. So we like brownfield projects and don’t invest in greenfield projects.
We are not a passive investor in alternatives; rather, we are a bit purpose-driven. For example, if we want to leverage the best global resources in certain areas such as healthcare and biotech, we’d invest in a private equity fund to help enhance our understanding of the sector and improve in-house investment capability accordingly.