The NT$88 billion ($2.9 billion) life insurance department of Central Trust of China is considering outsourcing some assets to external fund managers to get exposure to international equities, says president Alex Wang Jiunn-chih.
CTC, which is wholly owned by Taiwan's finance ministry, has just received approval to raise its quota of international assets from 22% to 30% and is likely to add foreign equities to its portfolio.
Although currently 19.76% of its assets are already invested abroad, these are mainly in fixed-income securities or mutual funds, mainly US agency debt, which provides a better rate of return than domestic government bonds after hedging costs. The CTC has managed its international assets by itself, because the product range has been limited, with no exposure to credit risk. But the CTC realizes it does not have the expertise to manage international equities on its own, says CK Chang, senior vice president and general manager at the life insurance department.
CTC's management is still discussing the size of assets to allocate to international equities, says Wang, with perhaps an initial goal of 5% of AUM this year, gradually increasing as the organization becomes more familiar with the asset class.
"We've just established internal guidelines for outsourcing to external fund managers," Wang says. Managers must have a solid credit rating, a good three- to five-year track record and scale, because the mandates will be global. The number of mandates will also depend on the asset allocation size.
CTC may also opt to do this itself by limiting its investment to mutual funds, rather than segregated accounts and rely on data such as Lipper rankings and Sharp ratios. This could make sense if the amount allocated to international equities turns out to be small. But Wang would prefer to outsource to professionals in order to learn how the asset class works.
CTC prefers to use advice and data from investment banks than to hire an investment consultant, he says.
The other area CTC is expanding is investment in structured products. Last year it experimented with products such as collateralized debt obligations and collateralized mortgage obligations. Unlike retail investors, Taiwan's insurance companies face strict regulatory limits on what kind of structures they can invest in, requiring packages with credit ratings above single-A. But investment bankers continue to show new products, particularly range accrual notes and new types of CDOs (in international currency), and Wang predicts the firm's exposure to these may grow to 5% this year.
CTC, with roots dating back to mainland China in the 1930s, is involved in a variety of businesses, including trust banking, so it acts as its own global custodian - a service it also offers to Taiwan's smaller insurance companies, notes Bessie Liu, trust department senior vice president. CTC also does procurement for state-owned companies and has a trading company. Its insurance business caters mainly to government employees.