China Pacific Insurance (CPIC), the parent company of the country’s third-largest insurer CPIC Life, has invested into China government bonds to seek better investment returns and lengthen portfolio duration.

The move has helped to bring about a satisfying financial result, Benjamin Deng, group chief investment officer (CIO) of CPIC, said in a webinar hosted by AsianInvestor in partnership with BNY Mellon on Thursday (October 29).

Benjamin Deng

"This year has turned out to be a very good year for us because we have been very disciplined in allocating tactically in terms of optimising the duration for our holdings in bonds and equities," Deng said.

For fixed income, CPIC predominantly invests in government bonds, which have seen their yield returning to the levels of October 2019, he said.

So far this year, CPIC has already exceeded its allocation budget, determined last year, for long-term China government bonds, Deng noted.

“We have exceeded that budget because of the market opportunities,” he added, stating that the insurer in the latter part of the year has been adding duration very aggressively by investing into the longer-dated bonds.

The yield will likely remain at this level for some time, according to Deng. “The room for further up-side is possibly limited, but the downside is also going to be limited. So it’s going to be range-bound for some time,” he said.

China 10-year bond yield was 3.22% on November 3, as compared to below 2.6% during the market meltdown in March, according to data from Trading Economics.  

Source: Trading Economics

In fact, local currency Chinese bonds across the board saw record net inflows totalling Rmb300 billion ($44 billion) in the first eight months of the year, thanks to the asset’s attractive yield and low volatility, Pictet Asset Management said in a note on November 3.

The asset class gives diversification benefits to global investors, and the continued strength in China's currency gives investors an additional source of return. The renminbi is close to an 18-month high against the dollar, Pictet AM said.

CPIC had Rmb1.6 trillion in investment assets as of the end of September, an increase of 12.7% from the end of 2019, according to its third-quarter results announced on October 30. Its annualised net investment yield for the first nine months of the year was 4.6%, down by 0.2 percentage points. However, the insurer's annualised total investment yield stood at 5.5%, up by 0.4 percentage points during the period.

The share of fixed income investments stood at 79.4%, down by 1 percentage point from the end of 2019; and that of equity investments was 17.1%, up by 1.4 percentage points.

POSITIVE OUTLOOK

On the equity side, CPIC stuck to its strategic asset allocation while intensifying counter-cyclical management and capturing market opportunities, Deng said.

It has been adding more private equity, as CPIC sees opportunities in initial public offerings (IPOs) and pre-IPO fund raising, he added. A booming IPO market gives investors more confidence in private equity as it is one of the popular ways for an investor to exit their investments.

"The private equity market is going to have a pretty good cycle in the next 10 years," noted Deng, so CPIC intends to structurally adding more private equity to its portfolio and building more capabilities in its teams. CPIC has previously expressed its optimism in private equity in early 2019.

Investors faced a lot of uncertainties at the beginning of the year, and the way CPIC approached these unprecedented challenges and market volatility was, first and foremost, sticking to its principle of being a long-term investor. As Deng noted, this is appropriate "because 90% of our business is life insurance".

Looking forward to next year, CPIC maintains a positive view of the global economy. Deng said this was because he believed global geopolitical tensions will possibly ease after the US presidential election on November 3, and that the Chinese economy will likely bounce back early next year amid the pandemic.

Deng noted that the two US presidential candidates, Donald Trump and Joe Biden, have different policy agendas and personal styles. The magnitude of normalisation will be different depending on who will become the president after the election, but the overall direction will be things will structurally revert to normality, he said.