Taiwanese insurance firms have this year been tactically increasing their allocations to US high-yield bonds and other higher-risk debt to boost performance, say asset managers. Such moves have apparently been funded by shifting allocations from money-market and investment-grade bond exposure.

Other assets attracting demand from these institutions include US mortgages and global private loans, said Christine Jih, Taiwan chief executive at BNP Paribas Investment Partners. 

Taiwanese insurers are also increasingly using exchange-traded funds (ETFs), which can be traded more easily than actively managed products, she told AsianInvestor. This reflects a trend among insurers across the region, as they seek to eke out better returns on a more opportunistic basis, according to BlackRock research published this month

HY bond appetite

This year institutional investors in Taiwan – especially insurers – have shifted some of their holdings in money-market funds (MMFs) and investment-grade (IG) bond funds to US dollar high-yield bond products, said Jih. She declined to provide specific flow data.

This appears to buck the overall trend, since assets under management in IG bond funds and MMFs have actually risen this year, alongside those in US HY bond products (see table below). Offshore HY bond fund AUM in Taiwan rose 7.2% in the first nine months of this year.

This reflects plans highlighted in May by the larger players – including Cathay Life, Fubon Life and Shin Kong Life – that they would increase their exposure to foreign bonds, with Fubon pointing to North American debt in particular.

AUM changes of Taiwan offshore funds in 2016, in T$ billions
  High-yield Investment-grade Money-market
September 920,763 80,684 36,568
August 919,405 79,175 35,316
July 901,652 80,053 37,064
June 880,005 73,978 37,525
May 899,479 76,688 28,407
April 907,843 73,152 28,856
March 862,578 71,103 29,574
February 847,220 66,836 32,453
March 858,839 67,277 32,907

Source: Sitca

Other fund executives confirmed a general rise in demand for US HY bonds. US HY bond yields hit a seven-year high of 10% in early February, sparking big inflows, said Andrew Jessop, Los Angeles-based high-yield portfolio manager at Pimco. Yields have since come down to around 6%, he added. Global retail flows into US HY bond funds had reached $16.8 billion year-to-date as of mid-October.

Still, positive flows have dominated in the third quarter as investors took advantage of attractive valuations surrounding the short-lived volatility, said a source.

This year’s increased interest in US high yield from Taiwanese institutions comes after a similar rise in flows from institutions in Europe and Japan in recent years, because of low or negative interest rates in those markets, said Jessop. The asset class already accounts for 3%-5% of US pension funds’ total portfolio allocations. 

But HY bond investment seems to be more of a short-term allocation for Taiwanese insurers, noted Jih (pictured right). They might shift back to safer assets such as MMFs and IG bonds when they reach their yield target, which is about 3%-4% return, she said. This year, investors in HY have been able to achieve that target within three to four months, whereas it has typically taken half a year to do so, she added. 

Since the end of this summer, investors globally who had allocated more to HY bonds had pulled back to a more neutral position, confirmed Jessop.

Insurance firms and private bank clients in Taiwan are also looking at other asset classes to boost returns. They have also shown strong interest in US mortgage funds this year, which have historically provided stable annual returns of about 5%, Jih said. 

Insurers have also shown interest in short-term private loans since last year, which can offer 4% annual returns over a three- to four-year holding period, she added. 

She declined to provide data on flows into loans or mortgages.

EM scepticism 

As for other fixed-income assets, institutional investors in Taiwan seem sceptical on emerging-market (EM) debt and equity, because they tend to prefer the bigger, mature developed markets, Jih said. They are also more confident about US dollar assets, she added, so any allocations to EMs are likely to be limited.

When it comes to DM equities, Jih noted, local insurance firms prefer Japanese and US stocks to European shares.