China’s Fosun Group is likely to issue more international bond mandates on behalf of its insurance businesses to help boost their investment returns, despite concerns about the potential impact of an inflation shock or US interest rate rises on fixed income assets.
However, the Shanghai-based conglomerate is not raising its allocation to what is sees as higher-risk alternative investments, in light of the high capital charges they attract. But it would consider moving into infrastructure assets, vice chairman and chief executive Liang Xinjun told AsianInvestor.
Fosun favours debt issued in South and Southeast Asia, Russia and Brazil in light of those countries' economic growth potential, he added, and the firm will continue to buy emerging-market bonds.
This continues a shift made earlier this year, when it moved to overweight EM dollar bonds. The company had taken the view that the US Federal Reserve would be reluctant to raise interest rates too much too fast, said Han Tongli, chief investment officer of fixed income, currencies and commodities, in March.
Fosun owns six insurers* across China, Hong Kong, Europe and the US, which between them hold Rmb164.6 billion ($24.7 billion) in investable assets. Of that, 74.1% was in fixed income as of June 30, up from 67.5% at the end of 2015.
Tracking consumption trends
Liang (pictured below) said Fosun’s guidelines for bond investments were in line with its general investment philosophy: to identify where to find the main consumers who will drive global growth in the next 10 to 20 years and make investments that benefit from consumption trends.
In this regard, Fosun is focusing on bonds issued in ‘high-growth markets’, such as South and Southeast Asia, especially India. The firm is also optimistic about Brazil and Russia, for their growth potential, as well as the opportunity offered by their weak currencies, after both have depreciated heavily against the dollar in the past few years. Both have recovered a little this year, but remain relatively cheap.
Liang was sanguine about the default risks of emerging-market bonds, saying these exist in every country. Investment managers simply need to study each region, industry and individual company to pick those that will not default, he said.
Moreover, when Fosun issues fixed-income mandates, it has in place a ‘capital exit plan’ in case of extreme situations, such as bond defaults, Liang added.
Even as many insurers in Asia have been raising their alternatives exposure, Fosun has very little of its insurance portfolio invested in hedge funds or private equity, given their high capital charges, said Liang. When it comes to alternatives, the portfolio is largely focused on property, which accounts for Rmb12.8 billion as of end-June.
The amounts of risk-based capital (RBC) that Fosun’s insurance businesses must set aside in the different jurisdictions they operate in for different asset classes are, on average: 70% for hedge funds or private equity, 25% for real estate and listed equity, and 3% for bonds rated at least single A.
Fosun may, however, consider adding infrastructure assets to its insurance portfolio, Liang said, since they are a good match for long-duration liabilities. RBC requirements for infrastructure range from 30% to 70% depending on the insurance market, he noted.
As of June 30, Fosun’s insurance portfolio's equity exposure stood at 10.7%, down from 12.4%. At the same time it had 7.9% in property (against 7.7% at end-2015) and 7.3% in cash (12.4%).
Fosun affiliates help its insurance firms make investments, Liang said. For example, Resolution Property Investment Management – a joint venture set up by Fosun Property and the UK’s Resolution Property in July last year – acquired Thomas More Square in London for £284 million ($426.4 million) in March on behalf of Fosun Insurance Portugal.
* Fosun's six insurers are Fosun Insurance Portugal, Ironshore, Meadowbrook, Peak Reinsurance, Pramerica-Fosun Life Insurance and Yong’an P&C Insurance.