Chinese insurance companies are venturing overseas, but Mark Konyn of Cathay Conning Asset Management tells Stefanie Eschenbacher that mandates to manage these allocations are hard to come by.
Institutional investors in China tend to follow the lead of sovereign wealth funds when it comes to asset allocation.
The recent announcement that the China Investment Corporation has ambitions to further diversify its portfolio could, therefore, trigger asset allocation changes on a grand scale.
Last year, executives of the sovereign wealth fund, which manages the country’s foreign exchange reserves, visited numerous countries and regions.
They also received more than 200 visiting delegations, with a large number of government officials and executives from investment institutions.
Even though sovereign wealth funds have a specific mandate that is different from that of other institutional investors, Mark Konyn, chief executive officer of Cathay Conning Asset Management, says they could set the longer term trend for outward-bound investments from China.
The asset manager provides strategies with risk and capital management solutions, and insurance research, for investors in the Asia Pacific region.
Its US-headquartered parent Conning is one of the largest asset managers for the insurance industry and has $85 billion of assets under management.
Its capabilities in Asia include Asia High Dividend Equity, Asia Small and Mid Cap Equity, China Focus Equity, and a range of advisory services when it comes to investment, enterprise risk management and peer analysis. Konyn says there has long been a desire among his clients to diversify their assets away from the rather narrow set of options domestically. This led to the launch of a multi-income strategy, the Cathay Global Multi Asset Balanced Fund, that invests in a globally diversified portfolio of equities, bonds, real estate investment trusts and other listed securities. Konyn says Chinese insurance companies are exploring the opportunities in different countries, asset classes and strategies.
“They are willing to look towards almost anything in the context of getting diversification or a higher return. Whether that is appropriate is another question,” he adds.
Although the potential in China is huge for asset managers, Konyn plays down the immediate opportunity to scoop mandates.
“We do see some opportunity for increased diversification for all mainland institutional investors, including insurance companies, but this is bounded by both the regulations and the need to match what are predominantly domestic liabilities,” says Konyn.
Approvals for overseas investment are still being given on a case-by-case basis and there are a large number of provisions, including solid risk management frameworks and certain capital adequacy standards.
Progress in the insurance industry has been slow, and all liabilities are onshore. Konyn says one of the biggest problems is the mismatch of duration these insurers face.
The China Insurance Regulatory Commission also caps insurance companies’ overseas investments at 15% of their total assets, although this may change soon.
Overseas investments have been encouraged straight from the top during the Third Plenum Meeting last year, and regulatory changes are likely. Beijing’s elite reiterated these ambitions during the National People Congress where the Chinese Communist Party has declared it a priority.
Chinese regulators have made other announcements over the years, promising that they will facilitate more overseas investments, but Konyn says earlier stages of overseas investment have been challenging. “The experience has been rather disappointing,” Konyn says. “As it is typical in Asia, the pressure to invest overseas builds up when overseas markets perform better than domestic ones.” The last time insurance asset managers moved overseas was just before the crash of the financial crisis, and some suffered financially as a result.
“The time it takes to process those decisions to invest overseas both from a regulatory and location point of view means that timelines are quite drawn out,” Konyn adds.
Konyn also points to the lessons learnt from the qualified domestic institutional investor programme, which launched in 2007 and enabled Chinese asset managers to invest money raised in China to invest overseas.
“We have seen repeatedly in the region, including in Malaysia, Hong Kong and Singapore, that investors came in at the top,” he says. “The government stimulus has actually been quite damaging for the asset management industry, it has compressed returns and distorted risk.”
Government stimulus has made asset allocation decisions on policy outcomes, which are hard to predict. Large Chinese insurers have set up asset management arms in Hong Kong. However, Konyn goes on to suggest that “the international experience dries up pretty quickly beyond Hong Kong equities”.
Cathay Conning Asset Management has helped some Chinese insurance companies to venture overseas. This includes planning a product line up, deciding how assets are going to be invested, establishing what the profile of liabilities will look like, and working out how to generate cash flows.
The difficulty for insurance asset managers is striking a balance between growth and market share, and profitability and capital requirements.
“In the early stages of development in the insurance industry there is a sprint towards growth and market share,” he says. “The eye is taken off the real goal, which should be profitability and being able to sustain the business in terms of producing capital that can be reinvested in supporting the business over the longer term.”
While much of the attention tends to be focused on China, simply because of the sheer size and potential, and the speed at which regulation changes, Konyn suggests there are opportunities across the region.
The other main markets for Cathay Conning Asset Management are Malaysia, Thailand, India, Singapore, Hong Kong, Taiwan and Japan.
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