China Life plans to continue raising its alternative and foreign allocations and to hand more mandates to external fund managers as it looks to reinvest Rmb500 billion ($72.8 billion) this year. It will also buy more domestic bonds.

The largest mainland insurer saw its investable assets grow 7% last year to Rmb2.45 trillion ($353 billion). But its gross investment return fell to 4.56% last year from 6.39% in 2015, mainly due to equity market losses, said vice president Zhao Lijun at the firm’s annual results announcement on Friday.

“China Life will need to improve its investment capability as the next step,” president Lin Dairen said at the same event.

Alternatives boost

Key to improving investment returns will be increasing exposure to alternatives and non-standard assets (NSAs), Zhao said. This is despite rising concerns that the illiquidity premium of investing in private markets is being eroded.

In China, NSAs refer to financial product investments such as debt investment plans, equity investment plans, trust schemes, wealth management products, project asset-backed plans and specialised asset management plans. Last year China Life’s exposure to NSAs rose by 1.84% to Rmb227.54 billion.

Zhao said China Life’s relatively low alternatives exposure was one reason for its decline in performance last year. While investment returns on alternatives have been falling, they remain higher than those on fixed income, he noted.

The insurer cut its allocation slightly (by 0.29%) last year to private equity funds, unlisted equities and preferred shares to 3.13%. Property stayed flat at Rmb1.19 billion (0.05%).

Outsourcing growth

Meanwhile, China Life plans to step up its outsourcing of mandates, Lin said, without saying by how much.

The insurer has increasingly been looking to external firms to help manage its assets to improve investment returns, he noted. It now uses about 20 fund houses for domestic investments and five to 10 managers for offshore markets, Lin said.

In August one of China Life's investment managers told AsianInvestor it had invested in six or seven overseas private equity funds – mainly buyout and M&A strategies with a focus on US assets.

Offshore expansion

China Life is gradually raising its offshore exposure, which stood at $8.6 billion, or 2.43%, at end-2016, up from 2% on June 30. It said in August it would raise the allocation ultimately to 15%, the current limit. Local rival Ping An is further ahead on this front, with 6% in foreign assets.

There is a reason for China Life's relatively slow rise in offshore exposure: such investments could be affected by the government's capital controls in the short term, Zhao said.

In the long run, however, the trend is for rising overseas allocations, as it is supported by initiatives such as Beijing's “one belt, one road” infrastructure project, Zhao said. The returns on overseas investments have been “ideal”, he noted, without giving more detail.

Of the $8.6 billion in offshore assets as of end-2016, $1.3 billion were in public-market mandates and the rest in direct property investment and private equity funds, including co-investments, Zhao said.

On the public equity side, China Life has – like rival Ping An – increased its allocation to Hong Kong stocks since September, Zhao said, without giving a figure. 

Domestic bond build-up

Meanwhile, the insurer has been increasing its domestic bond allocation this quarter and last, as it sees the expected interest rate hikes in China as short term and believes a low-rate environment will persist in the long run, Zhao said.

China Life’s allocation to bonds rose 2.08 percentage points last year to 45.63%. This comes as investors have largely been cutting back their exposure to renminbi-denominated issues due to expectations that the Chinese currency will weaken further against the dollar.

But in the longer term, foreign allocators are forecast to make big investments into the increasingly accessible onshore bond market. 

As for domestic equities, China Life's allocation to common stocks in 2016 rose 0.84 percentage points to 5.71% or Rmb140 billion. But for 2017, Zhao said the firm does not think that the fundamentals are there to support a big uptick in A-shares, so it will take a “prudent” view, focusing on stock picking and a “band trading” strategy this year.

This article has been corrected to show changes in China Life’s allocation to assets in percentage points not %