Taiwanese insurer Shin Kong Life will buy more foreign bonds this year – with the exception of renminbi debt – and will continue to underweight stocks, as it seeks to offset disappointing returns from domestic assets.

Normally, the firm puts about NT$200 billion ($6 billion) of its new cash holdings into investments every year, noted Stan Lee, senior vice president of Shin Kong Financial Holding, the insurer’s parent. This year they will mostly go into foreign bonds given the the latter's higher returns than other asset classes, he said during the group’s first-quarter results announcement.

In the first quarter, the overall return on investment (ROI) of Shin Kong’s foreign fixed income portfolio was 3.5%, as against 0.02% for domestic assets (Taiwan dollar bonds and equities).

Moreover, Lee said Shin Kong Life should buy more foreign bonds before interest rates rise along with the expected rate hike by the US Federal Reserve (see story on today's newsletter, 'Investors struggling with interest rate uncertainty').

This reflects a local trend, with the insurer’s two larger peers – Cathay Life and Fubon Life – also planning to increase their exposure to offshore debt, as recently reported. Taiwan's state pension pool, the Bureau of Labor Funds, is also raising its overseas allocation and recently made its first move into offshore private equity, as reported.

Of Shin Kong Life’s NT$2 trillion ($61 billion) in investable assets, 43.5% are in overseas bonds (up from 42.7% at end-2015) and 13.1% in international bonds, which are foreign-currency bonds issued in Taiwan (11.7% at end-2015).

However, the insurer plans to reduce its holdings of Formosa bonds – renminbi bonds issued in Taiwan – due to a lack of available RMB-hedging tools. Shin Kong Life will sell them or hold them to maturity, rather than buy more.

The direction of Chinese currency has been less predictable of late than in past years. Offshore renminbi hit a two-and-a-half-month low against the dollar yesterday amid weak sentiment on China and the greenback strengthening on growing expectations that a US rate rise may come earlier than expected. 

Moreover, emerging-market debt can provide good returns, but Shin Kong Life will not overweight the asset class, said vice president Lin Han-wei. It will only buy bonds issued in stable markets and by highly rated entities, he added. 

Shin Kong Life’s NT$1.15 trillion of foreign bonds comprise 56.1% corporate bonds, 23% international bonds, 14.1% non-US government agency bonds, 2.5% US government agency bonds and 4.3% mortgage-backed securities. Most are denominated in US dollars.

Some 30% of the foreign bonds were issued in North America, 28% in Europe (mainly the UK, Germany and France), 10% in China, 10% in other Asia-Pacific countries, and the other 22% elsewhere.

Other asset classes
As for stocks, Shin Kong will continue to underweight the asset class in light of market volatility, Lee said. Its equity allocation fell in the first quarter of this year to 10.7% (4.3% overseas equities and 6.4% domestic) from 12.5% at end-2015.

On the alternatives side, Shin Kong does not plan to make any big increases in its $100 million private equity allocation. “We still have space to invest more in this asset class, but do not plan to do so by a large amount,” Lee said, citing caution due to PE’s low liquidity. There is a cap on private equity of 2% of insurers’ investable assets.