China Pacific Insurance Company is understood to have awarded a $500 million mandate, split among five fund houses, to manage its first global multi-asset portfolio as it continues to revamp its investment allocation and strategy.

Two of the firms chosen by CPIC in December are Aberdeen Standard Investments and JP Morgan Asset Management, said well-placed sources. The duo – both well-established multi-asset managers – declined to comment.

“We are going into global multi-asset strategies with a currency hedge, as our first standalone allocation to this type of investment,” Benjamin Deng, CPIC’s chief investment officer, told AsianInvestor. “We will make the allocation as a separate account.

“We’ve just gone through the manager selection process and we are working on setting up the logistics now,” he added.

Deng declined to confirm or comment on the size of the portfolio or on the number or names of fund managers involved, saying only: “They are leading firms with strong track records and reputations in multi-asset investing.”

The portfolio will include bonds and equities and a currency hedge in the form of a total-return strategy with a target volatility level, he said. “It won’t have a target return, but we have an expected level we want to achieve.”

The decision to award the mandate is the culmination of several rounds of manager reviews and comes after CPIC had originally looked at setting up a global multi-asset portfolio in 2017.

The latest mandate is a modification of the previous one, with more clearly specified requirements on currency hedging, Deng said. He had paused the selection process after joining CPIC in September 2018, as he had felt the fund managers were not being clear enough about how the currency risks would be dealt with.

REFORM CONTINUING

The new mandate comes as China's third biggest insurer has been revamping its asset and liability management (ALM) approach, investment strategy and allocation under Deng, who was hired with that in mind.

Benjamin Deng, CPIC

He wants to see CPIC’s holdings of foreign assets expand. As of early last year, less than 1% of its Rmb1.37 trillion ($195 billion) investment portfolio sat in overseas holdings.

“I hope our offshore allocation will go up, for diversification purposes,” Deng said, adding that hedging back to renminbi from foreign currencies is becoming easier. That is necessary, as almost all of CPIC's liabilities are in the Chinese currency.

“There are still a lot of opportunities globally both from yield and risk-diversification perspectives,” he said. “In addition, the dollar-renminbi hedging market is developing. With US-China trade negotiations moving forward, we think RMB globalisation will progress.

“A few years ago we could only hedge [dollar-renminbi] up to two years," he added. "Now we see RMB hedging going out to three years, and even five years to some degree, through cross-currency swaps, and it is gaining liquidity.”

RMB VS FOREIGN BONDS

That said, returns on Chinese fixed income assets are higher than those widely available overseas. Domestic government bonds were yielding 2.88% as of February 25 according to Trading Economics figures, though they have dropped substantially from 3.15% in mid-January as investors seek safe havens because of the coronavirus.

In any case, once hedging costs are added, it is hard to find attractive fixed income assets offshore.

Accordingly, CPIC’s fixed income portfolio – which accounts for about 80% of its investment assets and includes private debt – is mostly in Chinese assets.

Admittedly, Deng said, “it’s expected that fixed income yields will go down in China in the medium to long term, but how fast that will happen is hard to predict. It may not happen as quickly as people think.”

On the private debt side, as is the case globally for many insurers, CPIC’s allocation is growing. It rose to 21.4% as of September 30 last year from around 20% at the end of 2018.

“We have invested in the overseas private debt market through funds,” Deng said. “But it is not a very significant part of our portfolio for various reasons, including currency risks and regulations.”

GRADUAL OVERSEAS BUILDUP

Ultimately, CPIC’s expansion of its overseas investment will be gradual, as Deng explained in detail recently. After all, he said, “even just 1% [of the firm’s assets] accounts for a substantial allocation”.

And returns have been strong, he noted. The net income for 2019 is estimated to be between Rmb27 billion and Rmb28.8 billion, which is 50-60% higher than it was for 2018.

“This increase is mostly due to investment returns and a change in taxation policies,” Deng added. “We’ve done some good work to generate alpha from public markets.”

Shanghai-based CPIC has also been building its exposure to private equity – again, largely onshore – and that is likely to continue.

In the insurer’s strategic asset allocation review last year, it increased its private and public equity allocation targets, Deng said.

CPIC’s portfolio of 'other equity investments' – comprising mainly private equity – stood at about Rmb63 billion as of September 30, up from Rmb55.4 billion at end-2018. Deng said that was “because we think PE is still going to perform better than other asset classes in relative terms”.

An extended interview with Ben Deng appeared as the cover story in the Spring 2019 edition of AsianInvestor magazine.