The challenge of navigating an ultra-low interest rate environment is felt particularly keenly by life insurers, and has led them to investigate other means of sourcing reliable long-term sources of returns. As one of Asia's largest insurers, AIA is at the forefront of these efforts.
While it retains a small overall allocation to alternative assets in the $326 billion of assets in its portfolio (as of December 31, 2020), this looks set to grow. Group chief investment officer Mark Konyn has long looked to find means to support the insurer's growing asset base, and that has increasingly led him to seek out various means of investing, particularly in private debt and, increasingly, infrastructure.
For AsianInvestor's inaugural alternatives newsletter, Konyn offered his views on how AIA approaches alternatives investing, the rising allure of infrastructure assets, whether the industry is becoming too crowded with funds, and how it is approaching the need for sustainable investing in the alternatives asset space.
Q How much exposure does AIA have to alternative asset classes today?
AIA has less than 2% invested in alternative asset classes.
Q How has your receptivity towards alternative asset classes evolved over the past three years?
There are a few factors influencing our approach to investing in alternatives. The first is scale. We are keen to ensure that we can take advantage of our scale and make meaningful allocations in dollar terms.
The second is operational efficiency. Internally we need to be able to organise our allocation so that our pre-trade controls are automated and that our risk oversight is configured to support aggregate monitoring locally and across the Group.
Third, we need to have the requisite capabilities in-house to fulfil the manager selection and oversight responsibilities. We have been building resources across each of these factors and I would say we have a constructive approach to expanding our coverage and exposure.
Q How have local regulations and capital requirements varied AIA’s exposure in different markets? Will forthcoming rules changes further affect this?
By their very nature alternative assets are discounted for capital purposes, so our assessment takes account of capital efficiency considerations and the diversification benefits that an alternative allocation can bring to the overall programme. Any changes in capital treatment will influence our approach at the margin. However there is a strategic argument for inclusion based upon the economic benefits aside from the capital considerations.
Again this can be an issue of scale, control and risk management for regulatory consideration. I believe it is incumbent on the insurer to demonstrate adequate controls, oversight and risk management – this is not merely a question of delegation.
Q Asia has traditionally lacked depth in local currency fixed income asset classes. Has this been similar for private debt and infrastructure debt assets and required a more international mindset?
In a word, yes. Capital markets across the region are still a considerable constraint for the insurance industry. Whether this is a lack of depth, free float, liquidity or maturity profile. As a long term insurer we seek long dated assets and where possible access international markets to enhance yield, total return and duration – and always consider these in local currency terms.
We have placed special focus on private infrastructure assets over the past few years and have engaged with an external fund manager to help us navigate this opportunity. It has been a gradual build out but an opportunity we feel is growing. Some jurisdictions do not allow loans in portfolios and other markets are dominated by bank lending.
We have placed special focus on private infrastructure assets over the past few years and have engaged with an external fund manager to help us navigate this
Q The depth of liquidity flowing into alternative assets appears set to continue growing, which could cause an inflationary impact on prices. How much of a concern is this for you?
I would not necessarily agree that any observed flow out of listed securities is a function of rising inflation. I would also caution about concluding too early that we have approached a threshold of higher inflationary expectations.
We are still very early in the Covid-19 recovery phase and data is likely to be unreliable in terms of serial comparisons through the entire 2021. It is not a surprise that private assets represent a significant allocation in many strategic programmes. Data has been available for a long time that shows this pattern in the US where exists the highest value of accumulated assets.
The question is more about access and relative value. Given falling expectations for returns on listed securities, it is a consequence that longer term investors that can tolerate lower liquidity, will seek higher returns from alternatives. However the term ‘alternative’ covers such a wide range of opportunities and many are not long term assets. Other investors simply like the return profile of alternatives regardless of the term structure.
For AIA we are conscious that some strategies can become crowded and there can be bouts of too much money chasing too few opportunities. Hence we spend a lot of our effort on the manager due diligence. We make our own assessment of each strategy and its sustainability.
Q What do you think is the least-discussed or considered risk of investing into alternative assets? How does AIA attempt to mitigate this risk?
Manager risk is often overlooked in the search for incremental return. We work hard to mitigate this risk through due diligence and the formation of a partnership approach with key managers. We prefer to work with a smaller number of well credentialed partners and have been investing our resources in risk systems to help us understand how each strategy supports the overall programme.
Q ESG has been gaining a lot of traction, and indeed AIA has become a UN PRI signatory. How do you overlay ESG considerations onto alternative asset investments?
Great question. ESG is intrinsic to our investment programme and criteria are embedded fully in to our assessment. This began with listed securities and we are now considering how to extend this approach to alternative and private assets, beyond what is clear and obvious as in the case of private debt.
[Ed: AIA has since announced that it will reduce its direct exposure to coal manufacturers to zero by 2028].