Prudential Life Assurance Thailand is pressing on with raising its allocation to offshore exchange-traded funds by as much as 5 percentage points, seemingly unfazed by swinging global market volatility.

It currently has an allocation to ETFs of between 5% and 10% of its $4.5 billion in assets under management, largely for overseas exposure, Yingyong Chiaravutthi, head of investments, said in an interview.

The firm, part of UK group Prudential, is looking to diversify its investment portfolio as global stock markets have plunged amid the Covid-19 outbreak and after a January ruling that allowed local insurers to increase their overseas allocation to 30% from a previous cap of 15%. 

Yingyong Chiaravutthi
Yingyong Chiaravutthi

The coronavirus outbreak sparked a massive global stock sell-off. The MSCI All Country World Index crashed 33% between February 19 and March 23, though has since recovered a little. The US's S&P 500 lost 20% in the first quarter.

Thai equities have suffered even more, with Covid-19 dealing a big blow to the tourism-and-export-oriented economy. The SET50 Index has dropped 28.87% year-to-date as of April 1.

High volatility in Thailand's debt market prompted the central bank to buy bonds, which amounted to more than Bt100 billion ($3.04 billion) during March 13 to 19 as part of a stimulus package, deputy governor Mathee Supapongse said in a statement on March 19.

Given the falls in the domestic stock market, Yingyong prefers offshore exposure. “The local bond market lacks liquidity and are in crisis as well, so offshore [investment] still is a source of diversification,” he told AsianInvestor.

Like some of its domestic peers, Prudential Thailand is looking at global equities and investment-grade bond ETFs as it adjusts its strategic asset allocation based on the new overseass limit, Yingyong said. 

“It's best to go for ETFs if we want to change our exposure and adjust that, rather than buying individual stocks," he added.

The insurer uses ETFs as a proxy to gain more exposure to an asset class, as they offer quicker execution and require lighter due diligence than active funds, said Yingyong. 

“It's more time and cost-efficient than having a lengthy discussion with asset managers to explain why we choose this one over that one."

EFFICIENT TOOLS

Prudential Thailand’s new ETF strategy doesn’t imply that the insurer prefers passive strategies over active funds, Yingyong stressed.

“If we could find active fund managers that we like then we don't have any issue with [active investing], but it just so happens that ETFs serve the purpose of efficiency,” he said.

“With ETFs you can break it down to different exposure or assets, but if you go for active, that actually requires a lot of effort to find several managers in a very fragmented universe to create the benefit of asset and index diversification."

The coronavirus-induced market shocks have revived the debate over the alpha-generating ability of active funds relative to passive strategies.

In a research note released on March 19, Morningstar’s Jeffrey Ptak concluded that active funds did not beat the US stock index any more often during the latest sell-off than they did before it. Of course, the outcome may have been different elsewhere, given the high efficiency of the American equity market.