Re-allocating into growth assets

Toon Krooswijk started as group head of investments and asset liability management at FWD Group last September, after a year’s sabbatical.

His most recent role was as Asia-Pacific regional chief risk officer at ING Insurance. He had spent 15 years with the Dutch firm, but the regional CRO position ceased to exist as a result of the divestment of ING’s Asian insurance operations. He has also held roles including chief insurance risk officer at ING Life Japan and for ING in Europe.

FWD, including the former ING Hong Kong, Macau and Thailand insurance businesses, has $8.4 billion in investible assets as at the end of December last year. By far its biggest portfolio is Hong Kong life ($5.6 billion), followed by the Thailand life portfolio ($1.8 billion).

The firm has a general insurance business in Hong Kong and a life insurance business in Macau. It set up a life insurance business in the Philippines last September and an alliance in Indonesia in January 2014.

Q Can you describe FWD’s asset mix?
A FWD is very much a fixed income investor. The majority of the portfolio needs to be invested in fixed income assets to meet the company’s solvency management and asset liability management objectives. FWD’s equity allocation is around 5-6% of total assets under management, but we expect to grow this allocation modestly in the near future.
We also have a small allocation to private equity and alternatives of 2-3% of assets under management, and we expect to grow this allocation over the medium term as well.
The fixed income allocation largely consists of investment grade corporate bonds. The allocation to government bonds is close to 20% and is used mainly for ALM and solvency management purposes. At the moment we do not actively invest in high-yield corporate bonds.  

Q Are you looking to diversify the portfolio further?
A Yes, we are looking to diversify part of the FWD Hong Kong fixed income portfolio into growth assets. For asset liability management and solvency management reasons, FWD Hong Kong will always need to have the majority of its assets invested in fixed income assets. However, we are re-allocating some fixed income assets into growth assets, not only to aim for higher returns but also in anticipation of rising interest rates.
We are looking closely at private markets, as many public markets in developed countries look expensive. Accessing private markets will allow our policyholders and shareholders to benefit from the long-term and somewhat illiquid nature of the insurance liabilities. For their benefit, we should be willing to give up some liquidity as we believe over longer horizons the risk-adjusted returns from private markets are likely to be better compared with the corresponding public markets.
However, we also recognise that private markets, in particular private equity, have in recent years become increasingly crowded with institutional money, and it will be more challenging for managers to achieve the types of returns that were achieved in the past. Strong manager selection capability is therefore a key success factor for allocations to private markets.
FWD Hong Kong also obtained a quota to invest in the onshore Chinese bond market and we expect to make our first investments in the second quarter of 2015.
For the Thailand portfolio we are looking to diversify into investment grade, US dollar-denominated bonds on a currency-hedged basis. For this portfolio we are also increasing equity allocation.

Q How are risk-based capital rules proposed in Hong Kong affecting your thinking? Do you take note of Europe’s Solvency II?
A On first impression the proposed rules may not be favourable for risk assets, equities in particular. This uncertainty makes us reluctant to suggest higher allocations to private equity and alternatives.
These types of investments are often not liquid. We do not want to end up with a high allocation to illiquid assets with a very high risk-based capital (RBC) charge. The Hong Kong RBC looks more likely to be closer to the Singapore framework than Solvency II. As such, Solvency II is of less importance to us at this moment.

Q Your role covers both investments and ALM. Is that common in Asia?
A It doesn’t seem to be very common, although several other companies also appear to combine these roles.

Q How is your portfolio positioned to deal with interest-rate rises?
A Most market participants that we speak to seem to believe rates will rise in the medium term, although people’s conviction level about this view seems to be lower than a few months ago. The timing of the rates rise is also very hard to predict.
For ALM and solvency management reasons FWD’s fixed income portfolio has a long duration. However, we are re-allocating some fixed income assets into growth assets, both for the purpose of achieving higher returns and to diversify away from fixed income in anticipation of a rate rise. Where possible we keep the fixed income duration short of the benchmark durations, but we are constrained by the high sensitivity of the regulatory solvency position to a decrease in interest-rate levels. Maintaining a short-duration position will increase solvency risk and we take this into account in our duration positioning decisions.

Q Have you had issues matching assets to liabilities given low rates?
A At current interest-rate levels the liability duration is very high. Matching to this duration will result in longer durations than we would want, given our view that interest rates are likely to rise in the medium term.
Another challenge is achieving the absolute yield levels required to meet the company’s long-term objectives. We are addressing this by diversifying part of the portfolio into growth assets.

Q What are the main investment challenges that FWD faces now?
A The main challenge is to improve the investment return with appropriate risk.

Q Have you been able to sell more investment-linked products?
A FWD Hong Kong’s ILP assets under management were $870 million at the end of 2014. Due to regulatory changes in Hong Kong, it’s challenging for the industry to grow ILP business.

Q How much do you outsource to managers?
A Almost all asset management activity has been outsourced. The only in-house activities are managing the US Treasury portfolio in FWD Hong Kong, FX hedging in FWD Hong Kong and a small equity portfolio in Thailand. Occasionally we also buy investments directly on to our balance sheet, but this is not the regular practice.

Q How do you select them?
A When we shortlist managers we look at their track record, financial and operational stability, fees charged versus the services provided, and their reputation. We also check that companies have the required licences and regulatory approvals to perform the requested activities.
Ideally we would select asset managers with at least a three-year track record for the strategy under consideration. However, sometimes we have specific needs that require managers to tailor a strategy, and a comparison to historical results becomes difficult and less relevant.
Another consideration is the number of managers that FWD can comfortably manage. We need to balance the need for a diverse set of managers to the complexity associated with managing a multitude of relationships.

Q Do managers provide your team with training?
A Some managers offer training opportunities, often through seminar or workshop attendance and sometimes through more dedicated training programmes. We participate in seminars and workshops on a regular basis.