Fubon Life raising US bond and PE exposure, cautious on EM debt

Taiwan's Fubon Life, with $95 billion in AUM, is putting its faith in North American large-cap credit this year and adding private equity exposure, but will be more selective on EM debt.
Fubon Life raising US bond and PE exposure, cautious on EM debt

Taipei-based insurer Fubon Life is raising its exposure to North American bonds and private equity, but remains cautious on emerging-market debt, even as its regional peers are said to be looking to EM to boost returns. On the equities side, it plans to invest more domestically than offshore in the second half of 2016.

The firm’s main focus for the rest of the year will be on large-cap investment-grade North American corporate credit, into which it plans to invest in-house rather than through external managers. 

Government bond yields are too low right now, but investing in higher-yielding, higher-volatility instruments can lead to problems, explained Raymond Lin, senior vice president at Fubon Life, at an investor conference on Friday.

He added that the firm needed to be prepared for a relatively low-yield environment for longer than it would like, because the UK’s vote to leave the EU had led policy makers to be more cautious with regard to interest rate policy.

Allocation shifts

Fubon Life, which has 59.8% of its NT$2.99 trillion ($95 billion) portfolio in foreign assets, has raised its allocation to overseas bonds to 51.6% as of June 30 from 43.1% at the end of the first half of 2015. This has come at the expense of overseas equities (5.8% at June 30, down from 8.1%) and lower-yielding Taiwanese debt (15.6%, down from 21.7%).

The rise in North American debt exposure has also meant a shift out of the ‘Asia and other regions’ portion (excluding Europe). North America accounted for 60.4% of its offshore bond allocation on June 30, up from 53.2% the previous year, while Asia and other regions stood at 19%, down from 26.3%. European exposure has remained flat at 20.6%.

As for EM debt, Lin said the insurer had cut its allocation and would in future be more selective on the asset class. 

The change in asset allocation helped Fubon Life’s recurring return rise to 3.52% (before hedging) for the first half of this year from 3.36% in the same period in 2015, said Eddie Chen, chief financial officer of Fubon Financial Holdings. The firm sees this as the most important return figure, because it refers to returns coming from recurring yields, such as bond coupons or dividends, as opposed to one-off capital gains.

The firm's recurring investment income was NT$49.9 billion for the first half of 2016, accounting for 82% of overall investment income, up from NT$42.6 billion and 60% for the first half of last year, added Chen. 

Alternatives and outsourcing

Fubon Life has the largest part of its alternative asset allocation in private equity, but does not reveal the size of its exposure. PE is the most attractive type of alternative investment, noted Lin, as it generates long-term capital gains from improvement of companies. The firm has invested in foreign PE funds and will continue to add more such exposure, he added.

Meanwhile, for overseas fixed income, Fubon Life is not considering engaging external managers now, Lin said. It awarded a few mandates in 2013 for BBB-rated bonds to fund houses such as BlackRock and Pimco. But now it largely makes its fixed-income investments in-house with a focus on large-cap IG bonds, so it is not seeking asset managers at present.

It's a different story for equities, Lin said. The firm has a few overseas equity mandates and may consider awarding more from time to time, he noted.

That said, for the rest of the year, the plan is to invest more in domestic stocks than foreign equities, for two reasons, Lin said. First, Taiwanese shares offer high cash dividends, which are important for recurring yields. Second, new regulations were issued in early August requiring insurers to hold more capital if they invest in overseas equities, especially emerging-market stocks, and less if they buy domestic equities. 

In addition to fixed income and equities, as of June 30 Fubon Life had 7.6% of its portfolio in deposits and cash equivalent, 7% in real estate, 3.1% in mortgage loans and 1.9% in policy loans.

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