Australian insurance group QBE is building its exposure to risk assets and making its first move into alternative investments in light of the continuing low-interest-rate, low-yield environment.
This involves increasing its allocation to emerging markets, equity, infrastructure debt, high-yield bonds, leveraged loans and property. And the firm will make more use of external fund managers to do so, said Gary Brader, group chief investment officer at QBE*.
The insurer had 7% of its $31 billion portfolio in risk assets last year, and it is aiming for 10% this year with a view to raising the figure to 15% in 2015. The firm is targeting a 2.25% overall return for 2014.
“It’s a challenging environment to get returns unless one is prepared to move heavily into risk assets,” Brader told AsianInvestor. “We have a very conservative and liquid investment portfolio, but we are moving to be less extremely vanilla conservative and liquid.
“We’re in the process of moving incrementally down the risk spectrum, but will end up in a place that’s conservative compared to our peer group globally,” he added. General, non-life insurers typically have 15-20% in risk assets, he said.
QBE has five categories of risk assets: equity; property (unlisted real estate investment trusts, no direct investment); emerging market debt (through mutual funds); high-yield and leveraged loans; and EM equity.
The last three of these are new to the portfolio for 2014. “We are aiming to have 1% [of the total portfolio] in each of those this year,” noted Brader, “and all those are being deployed to specialist conservative mutual fund managers.”
In addition, last year QBE started investing in infrastructure debt, handing two mandates to external managers for investment-grade-equivalent infrastructure debt. It now has around 1%, or some $310 million, in those assets and is increasing that allocation.
Brader also plans to make his first alternatives allocations next year, initially around 0.5% but with a view to bigger exposure down the line. “This may include private equity, infrastructure equity and hedge funds – we’re open-minded on what we might allocate to," he said. "We’re looking at a couple of platforms to give us efficient access to a variety of managers, strategies and vehicles.”
Social impact bonds is one new area QBE is interested in. These incorporate contracts where the government undertakes to pay for a successful social intervention that saves them money. They are being used, for example, in the UK in the prisons sector and in Australia with foster care, he noted.
Around 95% of the overall portfolio is managed in-house and 5% externally, but that 5% will grow, he said. “Where we don’t have in-house skill sets or our likely allocation are not going to be of the scale to warrant buying that in-house skill set, then we’ll buy external expertise. Essentially for anything that’s not developed-market equities or investment-grade fixed income, we might look for external expertise.”
Moreover, QBE expects to extend its portfolio duration. “We’re running short-duration strategies [shorter than a year] right now,” said Brader, “but are likely to extend that once yield curves prices in more meaningfully the likelihood of rate rises across the developed world.”
Meanwhile, QBE is combining its Asia-Pacific and Latin America units to form an emerging markets division, to reflect its focus on building a presence in such regions. David Fried, currently chief executive of Asia-Pacific operations, has been appointed CEO for the new division, effective from August 15.
*The full interview with Gary Brader will appear in the forthcoming (July) issue of AsianInvestor.