Asian insurers are more active than their western counterparts in preparing for the end of quantitative easing policies and are looking to diversify into higher yielding and less liquid fixed-income assets, boosting absolute returns as bond yields continue their upward trend.
To better prepare for the end of US quantitative easing in the next one or two years, 70% of Asian insurers said they will cut portfolio duration to reduce their interest rate risk, while 60% said they will move away from benchmarks to adopt more absolute return strategies, according to the world’s largest money manager BlackRock.
For a longer horizon over the next three years, 75% of Asian insurers said they will make strategic changes in order to produce adequate shareholder returns. One of the key concerns for these market players is the increasing cost of capital, unlike for those in the US and Europe, who cited low investment yields as a key concern, adds the fund house.
“While most insurers recognise that they need to change in order to boost shareholder returns, the survey suggests Asian firms are much more focused on using a tactical asset allocation framework to boost shareholder returns than their global counterparts,” said David Lomas, head of global financial institutions group at BlackRock.
“Asian insurers are also more active in preparing for the end of quantitative easing policies and are looking to invest into new diversifying fixed-income asset classes.”
Rising yields
Although bond yields have been rising steadily in the past few months, they remain below average in the most liquid markets and duration risk remains near historic highs, highlights Blackrock.
Driven by low rates, insurers in China, Singapore, Taiwan and Malaysia indicated a particularly strong interest in shifting to higher yielding fixed-income instruments.
Some 58% of Asian insurers said they will allocate more to less liquid assets but only at a small proportion of their portfolio - 1% to 5% - over the next three years.
Meanwhile, insurers in China, South Korea and Taiwan showed a strong likelihood of increasing allocation respectively to real estate debt, real estate equity and hedge funds, adds the fund manager.
“Asian insurers recognise the importance of engaging more closely with external asset managers who can support their specific needs, particularly in the use of new instruments such as ETFs [exchange traded funds], investment strategy design and risk management,” said Lomas.
The shutdown restored confidence among debt investors and prompted economists in a Bloomberg survey on October 17-18 to predict the Federal Reserve will keep buying $45 billion of Treasuries and $40 billion of mortgage-backed securities each month for at least five more months to buffer the economy.
As a result, the 10-year US Treasury yield fell to a three-month low of 2.46% last week after climbing to levels not seen since July 2011 in September, which closely touched the 3% mark.
BlackRock, in partnership with the Economist Intelligence Unit, surveyed more than 200 insurers around the world in May and July 2013. Forty of those surveyed were from Asia Pacific, including China, Malaysia, Singapore, South Korea and Taiwan.
