Amid a tough environment for achieving returns, HSBC Insurance is considering making its first investments in currencies and physical commodities.
It is also mulling other ways of boosting yields, such as allocating more to alternatives, high-yield and local-currency emerging-market debt and index-agnostic equity strategies.
“We are increasing our allocation to return-seeking assets,” says James Hughes, group chief investment officer at HSBC Insurance in Hong Kong*. He is responsible for investment of the firm’s general-account insurance assets globally, which total about $75 billion, the biggest chunk of which – more than a third – is in Hong Kong.
The return-seeking/growth side of the portfolio allocation, which varies by country and depends on regulations, ranges between 7.5% and 20% of total assets. Core government and investment-grade bonds make up the remaining 80%-plus.
HSBC Insurance already invests in equities, return-seeking fixed income such as Asian bond funds, high-yield debt, emerging-market debt, plus hedge funds, private equity and infrastructure.
But it doesn’t have direct allocations to currencies (apart from for hedging purposes) or physical commodities, and is considering ways of investing in those asset classes in the next six months, Hughes tells AsianInvestor.
“In certain jurisdictions, such as in China and most of Latin America, our insurance business can’t buy hedge funds or private equity assets,” he adds. “But commodities and currencies have interesting return profiles, and we are reviewing products in those areas.”
Hughes also sees numerous opportunities arising across the fixed-income space over the next few years and the firm is adding an allocation to ‘opportunistic’ fixed income to take advantage of market inefficiencies in this regard.
“Of course, it’s not just about the potential return,” he notes. “It’s about what all these assets do to the overall correlation and volatility of your portfolio.”
The shift towards higher-returning investments is necessary, says Hughes, because “there’s not much luxury at the moment for insurance firms to rest on the investment side – you really are sweating every asset”. He points to the current low-interest-rate environment and suggests that is likely to persist for the medium to long term, and probably for longer than people think.
Moreover, there are a lot of new regulations coming in, such as Solvency II and new accounting rules like IFRS 4 and IFRS 9, he notes. “So you have to be aware of what’s happening in terms of capital requirements to support some of your investments.”
“Given the current investment landscape, the environment is such that every basis point counts,” says Hughes, “and I’m not sure everyone has woken up to that yet.
“So it’s about seeking new investment ideas, seeking new asset classes, doing an awful lot of market research and about thinking twice about every allocation you’re making.”
*An extended interview with Hughes will appear in the upcoming (April) issue of AsianInvestor magazine.