Cathay Life, Taiwan's biggest life insurer, is seeking fund houses for absolute-return mandates investing in developed-market government bonds, as it looks to cut back on benchmark-driven strategies.

This is be the $156 billion asset owner’s primary goal in awarding bond portfolios, chief investment officer Joseph Wang told AsianInvestor.

Cathay Life’s liability cost – the rate at which it has guaranteed the insurance policies it has sold – is about 4.2%, and that’s the target for the new mandate, Wang said.

Absolute-return aims

The insurer is looking to achieve absolute return on a day-to-day basis, he noted, “but maybe 80% to 90% of the asset management community is still very much benchmark-driven”.

“We hope they [asset managers] can adjust to the direction of absolute return,” said Wang. “We’ll greatly reduce the benchmark-driven types of mandates.”

As of September 30, 59.3% of Cathay Life’s investable assets were allocated to bonds. Overall, external mandates account for about 20% of Cathay Life’s total portfolio. US-based asset manager Conning, owned by Cathay Financial Holdings, accounts for the majority of that, managing US corporate bonds.

Cathay Life may expand its use of external managers, depending on how soon asset managers could adapt to its need for absolute return, Wang said.

Absolute return is gaining popularity among other asset owners in Asia too. For example, Taiwan’s Bureau of Labor Funds issued its first absolute-return fixed income mandates, totalling $3.6 billion, in December. The $106 billion state pension manager said that while bond yields had fallen and even turned negative in some markets, fixed-income assets were still important for pension funds globally.

US bonds still favoured

Meanwhile, Cathay Life still likes US corporate bonds, said Wang. He is optimistic that if Trump offers tax incentives for American multinationals companies to repatriate their capital, many of them won’t need to issue new bonds, as they had in the past to support capital expenditure.

“If the supply of US credits goes down it would lead to rising bond prices and a further tightening in spreads,” Wang said.

As of September 30, 52.5% of Cathay Life’s total portfolio was in international bonds. About 43% of its overseas fixed income assets were in North America.

In November, Cathay Life and Taiwan Life had already voiced their faith in bonds despite US rate hike expectations, as the two insurance firms expected fixed income returns to come from yields rather than capital appreciation.

Cathay Life is also continuing to buy US government bonds, partly for trading purposes and partly for protection. “In harsh scenarios, US Treasuries are a very good tool to protect other asset classes, so [they have] strategic importance in our overall portfolio,” Wang said.

In particular, 30-year US Treasuries yielding above 3% and 10-year US Treasuries nearly 2.5% are very attractive, he added.

An extended Q&A with Cathay Life’s Joseph Wang will appear in the upcoming February/March issue of AsianInvestor magazine.