In a world of negative real interest rates and rising inflation, how do insurers go about diversifying their public portfolios and what strategies do they adopt?
Muhamad Umar Johan Sidik CIO at Sequis Life and Boris Moutier, CIO, Japan and Asia, at AXA told AsianInvestor’s Insurance Investment Virtual Forum how they recalibrate their portfolios at a time when inflation is driving down purchasing power and credit diversification is key.
“In general we see our investment portfolio to be optimally structured,” Johan told the panel. “Taking diversification and costs into account, we are structured to avoid unnecessary taxes, while considering all legal and regulatory characteristics.
"In Sequis, our diversification in non-core portfolio – alternatives and private assets – has been underway for at least six or seven years so it’s nothing new and we already have a clear picture of what we focus on.
He added that the Indonesian life insurer has been increasing allocation to private assets regularly, "particularly at a time when the long-term outlook for equity-bond strategies is considered challenging.”
However, it does face challenges such as regulations that place limits on investment in offshore assets. In particular, Indonesian insurers – in terms of offshore assets - are limited to just 20% of their available investments.
“And we’re only allowed to invest under two categories: mutual funds ETFs or direct participation. Outside these categories, it’s either not allowed or the asset is extracted from calculations.”
Boris Moutier, meanwhile, gave details about how AXA invest in private credit and how it monitors its risk threshold.
“Our approach for some time now is to work with carefully selected GP partners with whom we have a global and long-lasting relationships,” he said.
He added that in terms of risk, this was heavily tested during the Covid crisis but overall the GPs that AXA works with had been successful in managing that risk.
“Risk is really (based on) the premise the good credit profile of this asset class – especially the covenants the GPs are able to obtain. Therefore the total risk appetite is driven by the total liquidity at the balance sheet level that we need to maintain and as well the fact that we remain selective in terms of GPs,” he said.
While AXA has a global operation, it also invests significantly in the countries in which it operates. So how does AXA balance GP selection and local expertise with a global scalable presence?
“When you consider Asian private debt, we are discussing with local GPs with a local footprint and are more Asia-focused but so far at the end the traction is greater with global players,” Moutier said.
“But one thing is sure at the end of the day that quite a few of these global players also have a strong local footprint in all our local Asian markets so clearly that gives us the comfort that they can leverage not only their global machinery but as well their local contacts.”
Having long-lasting relationships with local corporates, many of which are family-owned, is critical in Asia, he said.
“And those guys have it.”
Echoing Johan's regulatory restraints, Moutier, when asked about public versus private access, said that various capital controls within the region could sometimes be what he termed a “show stopper”.
“I can give the example of Thailand where when you go offshore in terms of credit it has to be investment grade,” he said. “In terms of domestic credit, the set up opportunity is mostly still tilted towards public.
“It’s not that the public corporate markets are necessarily cheap or diversified enough but this is where the access is available. I think the local markets will have to mature further so that significant allocation can be made into private.
“But I think that should remain a priority for all of us.”