Asian insurers eye ETFs, hedge funds, property

Asian insurers are seeking ways to diversify their portfolios and are more keen on absolute return strategies than their global counterparts, finds a BlackRock survey.

This has been sparked by anticipation that the US Federal Reserve will begin curtailing its quantitative easing programme within the next two years.

Some 70% of regional insurance companies say they will cut the portfolio duration on their bond portfolios to reduce the risk of rising interest rates, compared with 57% in Europe and 55% in North America.

Sixty-five percent of the region's insurers aim to diversify their fixed income exposure, with insurance firms in China (100%), Singapore (100%), Taiwan (75%) and Malaysia (67%) saying they aim to invest in more high-yield bond funds.

In addition, 60% of Asian insurers say they are shifting away from benchmark investing and allocating more into absolute return funds.

This is particularly noticeable among respondents in China, Korea and Taiwan, which expressed a strong desire to increase allocations to hedge funds and property in the next three years.

All of the Taiwanese and Korean insurers surveyed plan to increase allocations to real estate equity funds, while 75% of Taiwanese and Korean insurers are seeking more exposure to hedge funds.

Meanwhile, 86% of Chinese insurers plan to increase investment in hedge funds, real estate equity funds and real estate debt strategies, according to the survey.

This compares with only 52% of insurance companies globally expressing an interest in real estate debt, 55% in real estate equity and 50% in hedge funds.

Still, hedge funds and real estate funds will remain a small portion of Asian insurers' overall portfolios, not surpassing 5%.

The region's insurers are still in the early stages of adopting alternative strategies when compared with their Western counterparts, notes the survey.

Asian investors are also exploring new investment vehicles such as exchange-traded funds. Some 74% of Asian insurers said they are likely to increase their use of ETFs over the next three years. This compares with 81% in North America and 85% in Europe.

In addition, Asian insurance companies are interested in working with external asset managers to assist them with investment strategy design and risk management. This is a direct result of them seeking returns in new, unfamiliar areas, the survey says.

When it comes to assessing risk, 38% of Asian insurers surveyed say the main challenge in this area is a lack of sufficient expertise. This compares with 22% of European investors and 16% in North America.

Sixty-five percent of insurers in the region say risk management/governance is an area they need to work on, and they prefer to partner with third-party asset managers for advice on this front. This was particularly noticeable in China; 85% of mainland insurers said they need help with risk management.

In addition, 70% require help from third-party asset managers on investment strategy design, compared with 61% in Europe and 48% in North America.

“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, investment strategy design and risk management,” says David Lomas, head of BlackRock’s global financial institutions group.  

BlackRock, the world’s largest fund management company with $4 trillion AUM as of September 30, surveyed over 200 insurers globally, 40 of which are located in Asia, across China, Japan, Korea, Malaysia, the Philippines, Singapore and Taiwan.