The UK's Legal & General has a small proportion of its £80 billion ($103 billion) institutional retirement portfolio invested into Asian assets, but that exposure is rising, with the British insurance and savings giant taking a favourable view of the region’s prospects.

“Our allocation to Asia is increasing,” the firm’s head of investment solutions, Sumit Mehta, told AsianInvestor last week, while declining to reveal its current size. LGRI's public market investments will rise faster than its private asset exposure in the region, he added.

The bulk of LGRI’s global holdings – managed on behalf of UK corporate pension schemes – are in fixed income, and it has exposure to Asia across both public and private markets, but mostly in the former.

LGRI invests in Asia via the group’s asset management arm, Legal & General Investment Management, through segregated mandates. London-based Mehta declined to provide more detail on how Asian assets fit into those portfolios.

Sumit Mehta

As to the reason for LGRI’s growing focus on the region, he said: “At a high level, Asia is too important to ignore.” The business takes into account the political and macroeconomic climate and sovereign risk in such thinking, he added.

“Take Latin America and Asia. Compared to 10 years ago, Asian countries look in better shape than Latin America from a political climate perspective,” Mehta said. Asia’s response and ability to manage the Covid-19 crisis has been another positive, he added.

Asked where LGRI sees particular investment opportunities in the region, he said: “Given that most of the portfolio is outside Asia, I would express our views in terms of themes. The key themes as to where we feel long-term investors like us are looking to put our capital – clean energy, digital infrastructure – are relevant themes in Asia as well.”

Like numerous institutional investors, LGRI is looking to build strategic allocations to the region based on these themes, but Mehta declined to comment on whether or how it was looking to build exposure to China as that country opened its markets. 

Similarly, numerous pension plans across Europe and North America are busy working to increase their investment allocations to Asia. Canadian retirement funds, such as CPPIB, CDPQ, Ontario Teachers and Ontario Municipal Employees, are among the most active in this regard, but the Netherlands' APG is also strongly expanding is presence.

CREDIT RISK CAUTION

While LGRI is mostly invested in sterling-denominated assets to match its liabilities and hedges its foreign-currency exposures back into sterling for those liabilities, Mehta said, it sees portfolio diversification as very important.

It may also be that exposure to Asian assets provides a fillip to returns given both the region’s faster regional bounceback from the pandemic and its longer-term growth projections.

When it comes to seeking return amid the low-yield environment of the past decade, LGRI has been more cautious than many of its peers, Mehta said.

“The decrease in global yields has been a massive challenge for investors like us, especially given the open-ended nature of the [LGRI] fund, which means we cannot wait indefinitely for better entry points,” he noted.

A typical investor response to falling interest rates since the Covid crash in March has been to hunt for yield by going down the credit quality curve towards cyclical and leveraged sectors, said Mehta.

“The growth of the cyclical, BBB part of the US credit market is well-documented,” he explained. “We’ve been fairly defensive in terms of our investment strategy. We’ve been very careful in terms of allocations to cyclical sectors.”

One-third of LGRI’s portfolio is in BBB-rated bonds, which is the same percentage at year-end 2019, Mehta said. Lower-rated, cyclical exposures are kept to a minimum, he added, with less than 1% of the portfolio in bonds issued by airlines, hotels, leisure and traditional retail.

As a consequence, LGRI has experienced about £25 million of defaults over about 10 years on its whole portfolio, with none in the first half of this year. “That goes to show the portfolio’s resilience,” said Mehta.