The investment architect
Canada’s Sun Life Financial has a long history in Asia. It opened in Hong Kong in 1892 and Manila in 1895. Starting in 1995 it has built a business in Indonesia. These operations sell life insurance, mutual funds and unit-linked products.
Collectively they run $7.3 billion, managed by local units that coordinate with a Hong Kong-based asset-liability management team and with Michael Manuel, Manila-based Asia CIO for Sun Life Financial. Of those assets, $4.2 billion is sourced from Hong Kong, $2.5 billion from the Philippines and $600 million from Indonesia.
Manuel began his career in the Philippines as a bank credit analyst and an equities analyst. In 2003 he joined Sun Life in the Philippines, initially as an equity portfolio manager. He began the regional CIO job in 2011.
Today he works with his teams and counterparties to anticipate global rises in rates, as well as to develop a regional capability to invest in private and illiquid assets.
Q How do you and your local investment teams cooperate?
A Each of the three business units has their own investment team. Then there is a regional ALM [asset-liability management] team based in Manila and myself. The ALM team and I set out the specs for our life insurance portfolios.
We’re like architects. We look at the characteristics of our various liabilities, duration needs and appetite for currency or credit risk. The ALM team draws the blueprints and gives them to the investment teams, which are like contractors who put up the building. They work off the ALM blueprints but, because they are close to the ground, they can report back on local asset classes. What’s mispriced, what’s available to buy? I help incorporate that feedback into the portfolio guidelines and priorities.
Q To what extent does your Canadian parent set these policies?
A Sun Life Financial has an overarching policy over matters such as how much interest-rate risk we are willing to take. It also requires that we match currency risk almost point for point. But from the perspective of doing the nitty-gritty work, that is really driven locally. I’d say the local units have an equivalent voice. Unlike some other companies where the global headquarters decides everything, our corporate policies are more like guidance.
Q How similar are liability profiles among your three Asian businesses?
A Product development is cohesive across our markets. There is a regional head of product development, and so our offerings are similar.
Q And liability durations are also similar?
A We don’t have a [property & casualty] business. All of our policies are related to long-term life insurance. In Hong Kong and the Philippines, we have some large blocks of business that are set to mature over the next two or three years. These represent 15- and 20-year policies written before 2000. In the Philippines we call these closed blocks, and we have one that’s around $750 million that will pay out when it matures.
Q Does that create issues for you?
A No. Our company identifies these blocks in advance and is working to turn these into other products. We have a recapture programme to ensure we educate policyholders of options other than putting their proceeds into a bank deposit, where it would basically earn nothing.
Q So what’s the average duration of your liabilities?
A Our ALM team searches for assets of an average duration of 12 years. It’s easier to do in Hong Kong, where our liabilities are typically about 50% to the HK dollar and 50% to US dollar. That portfolio is almost entirely allocated to US dollar assets, and a big proportion is managed externally.
We have two affiliates, Sun Capital and MFS, both in Boston. From our acquisition of CMG’s insurance business in Indonesia in the 1990s, we also have a relationship with First State Investments, which manages some of the US dollar portfolios. These managers have leeway in how they manage duration and interest-rate risk.
Q How do you find long-duration assets in the Philippines and Indonesia?
A The regulations in these places are strict. It makes it hard for us to go offshore to seek long-duration assets. That means we have to back our local liabilities with local assets. Although you can get 25- or 30-year government bonds in the Philippines, there is a limit, and the average duration of our portfolio is 11 years. But our local liability average duration is 17 years. It’s hard to close that gap.
Q So what do you do?
A You have to be creative. We can try the cross-currency swaps market. And we have a certain portion of our bonds in which we back-end the coupons’ payment. That synthetically creates a longer-duration bond from a peso perspective.
Some countries allow you to buy other countries’ sovereign bonds if they are investment grade. We can ask the Insurance Commission in the Philippines to buy Indonesian sovereign bonds in dollars and swap those into pesos. Sometimes we can also reshape the coupon profile of such issues.
Q You mentioned it’s hard to invest Philippine and Indonesian portfolios overseas. But is it impossible?
A The Philippines is more open. When we talked to the central bank about this in 2004, the country had only $15 billion in external foreign reserves and the authorities were worried about dollar outflows. But today we are getting $2-3 billion of inflows a month thanks to foreign remittances and the BPO [business process outsourcing] industry, and foreign reserves are around $90 billion. Today we have too many dollars and we can execute large cross-currency swaps.
We also work with banks to create structured notes for our unit-linked customers. We can’t peddle the same story about domestic stocks or bond markets every year, so we have diversified these products so they get exposure to a basket of Asia-focused funds that are managed offshore. Banks such as Deutsche, Citi, Barclays, ING and BNP Paribas partner us on structuring principal-protected notes with upside from themes, such as US recovery or emerging-market growth. We tend only to sell simple products that laymen can understand.
Q In HK your team has more latitude?
A Yes, but plenty of ALM work still needs to be done there.
Q And you’re more exposed to the expected increase in US interest rates.
A Since the start of this year we’ve seen that some segments of the US dollar portfolio can benefit from longer duration strategies. We have begun to identify long-term bonds that will mature in the next three or four years. We ask if we can sell these now and take those proceeds and move into spread products. We have bonds in our shorter-duration bucket that are rated double-A or single-A. We can sell these and move into longer-duration bonds rated single-A or triple-B.
Q So you’re increasing duration as you go down the credit curve. Is this managed in HK?
A No, it’s done by our teams in North America. But we want Hong Kong to take more opportunity of what’s available in local markets. For example, we will be shifting more into Hong Kong dollar-denominated assets. We also want to develop more investment capabilities in Hong Kong, including Asian fixed income, both sovereign and investment grade, as well as private debt.
Q Are you building a team to do this?
A We’re exploring. We’re getting our feet wet. Banks are showing us opportunities in private debt that can provide spreads worth considering. We have so many sovereigns backing our liabilities, especially in the Philippines and Indonesia. In Hong Kong, our other assets are in triple-A rated securities. We have a lot of room to take some credit risk, and there’s now plenty of liquidity in Asian markets. We can add spread risk without getting close to our risk thresholds.
In North America, Sun Life allocates something like 60% of its assets to spread products: private debt, commercial mortgages, real estate and private equity. We don’t have any illiquid assets in Asia, it’s all sovereign or high-grade bonds.
Q Does that mean hiring specialists in Hong Kong?
A For now the ALM team is doing the planning, seeing how this could impact our credit and duration parameters, as well as the portfolio’s yield. They’re doing the black-box type calculations and we’ll use that analysis to see what market segments we should target. We’ve already begun talking about specific assets we could buy with our banking counterparties, and we’re just waiting for the ALM team to give us the green light.
Q That’s for bonds. What about for real estate or private equity?
A We’re discussing with colleagues in North America on a nightly basis about areas in private debt. For now, we have more than 100 investment professionals there who focus on illiquid asset classes. They know how to analyse pricing and measure our capital commitments. At some point we’ll want to add Hong Kong to the global team. They’ll still manage the balance sheet for the entire group and we’d fit into that structure. There wouldn’t be enough for us to do if we appointed a whole team here just to look after our three Asia markets. But assuming we expand the global team to Hong Kong, it’s possible we would also look to work with third-party managers here.