Multi-asset managers eye Chinese insurers

Though curbs on mainland insurance firms investing overseas have been relaxed, return expectations and restrictions on derivatives are seen as hurdles to flows into multi-asset strategies.
Multi-asset managers eye Chinese insurers

Multi-asset fund managers* are hoping for a surge of inflows as a result of the deregulation of China’s insurance industry, but not everyone is convinced such strategies will prove popular.

In October 2012, the China Insurance Regulatory Commission (CIRC) relaxed restrictions on domestic insurers investing overseas. It allowed investments in 45 countries – 20 of them in Asia – and expanded the permitted investable asset classes from equities and bonds to include infrastructure projects and real estate.

But mainland firms are taking their time over raising their overseas allocations, for a number of reasons, including lack of familiarity with foreign assets, the need to match to domestic liabilities and high returns available onshore.

About half of the mandates so far issued by insurers have been for multi-asset strategies, estimates Eric Poon, regional head of institutional business for Asia at 
UK fund house Baring Asset Management. Of the remainder, he added, half were for US or global equity strategies and half for Hong Kong equity strategies.

One area Chinese insurers have been looking at is alternative assets, noted Paul Price, Morgan Stanley Investment Management’s global head of distribution. But he said his firm is more excited about the prospects for asset allocation products and certain specific mandates, such as for US equities. 

And both Poon and Garth Taljard, Asia head of multi-asset product at Schroder Investment Management, forecast that a number of multi-asset mandate announcements will be made this year.

The mainland could see a total of $158 billion in insurance mandates awarded to foreign asset managers by 2018, said Shanghai-based Z-Ben Advisors in a report issued last week. “The first few billion have already begun to trickle out, with several insurers issuing the first-ever RFPs for offshore investment in the first half of this year.”

But Paul Chan, Asia ex-Japan CIO at US fund house Invesco, is not convinced that multi-asset strategies will be the biggest winners from these flows, as they cannot match mainland investors’ annual return expectations of around 8-9%.

Only Hong Kong and emerging market equities could meet insurers’ return expectations, he suggested, with anticipated continued strengthening of the renminbi also a factor boosting interest in mainland investments.

Still, multi-asset funds are well placed to meet the long-term liabilities of insurers, said Philip Saunders, London-based co-head of multi-asset at Investec Asset Management. “They are well suited for liability matching purposes – or a certain level of outperformance above cash or CPI [consumer price index],” he added.

This outcome-oriented investment approach involves less constrained and more dynamic management and greater diversity than the conventional benchmarked bond and equity-heavy multi-asset strategies of the past, he added.

But the more dynamic allocations of multi-asset strategies could be constrained by Chinese rules limiting managers’ allocations to derivatives, which form an important source of return in multi-asset funds.

Hedging may protect investors against downsides, but institutional investors typically look to absolute returns – cash or inflation index plus 3% to 4% is popular in Asia – and derivatives would not create outperformance when equities and bonds are not delivering.

Overall, Z-Ben forecasts that by 2018 Chinese insurance firms’ assets will surpass $2.25 trillion, of which $300 billion could be invested offshore. Asset growth is expected to accelerate as regulators will continue to foster greater competition in the sector.

Moreover, Z-Ben estimates that some 30% of Chinese insurers’ assets are parked in unproductive deposits. They could be moved to higher-return investments, including offshore products, it noted.

* A feature on multi-asset funds will appear in the upcoming July issue of AsianInvestor magazine.

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