Eyeing real estate and infrastructure

Jeffrey Tan is Hong Kong-based director of investment and corporate finance for Asia at Belgian insurance group Ageas. He oversees €25 billion ($33.2 billion) in assets for the firm’s life and property-and-casualty businesses across the region.

Ageas has operations in five Asian markets: China, Hong Kong, India, Malaysia and Thailand. The Chinese business was set up in 2001 and is the biggest unit, with $12 billion under management, making it the seventh largest insurer in that country by assets.

Q What is the breakdown of your life assets?

A Within the strategic asset allocation [SAA], the equity allocation ranges from 2% to 12% depending on various factors, such as Ageas’s current solvency level and the target solvency level in the short to medium term.

With regard to asset classes, typically fixed income will be 75-80% and can even rise to 90% of the total portfolio.

Q What grade of bonds can you invest in?

A It’s down to government regulations in each country. Regulators give more latitude for domestic bonds (typically investment-grade and above) and are generally stricter for overseas bonds.

We also buy structured notes for ALM [asset-liability management] purposes, in order to lengthen portfolio duration and obtain sufficient yield. For example, we did the first structured note for ALM purposes in 2005 in Thailand.

Q How do you decide on the SAA?

A The SAA is determined by factors like market volatility, risk budget, risk appetite, and the size of percentage drop it can tolerate in terms of P&L. It is typically reviewed at least once a year, or when there is a significant change in the markets.

We also conduct specific stress tests, given our experience that correlation creeps and spikes happen at tail events.

Q Do you invest in alternative assets?

A Yes. For example, property as an asset class has really come into play – we have been focused on it more since the end of 2008, when we realised quite a few asset classes are not stable because their volatility is so huge.

For example, in 2010, we bought a commercial building in Thailand from Lehman Brothers, which had nine properties for sale in the country. This was seen as an expansion, as it was right next door to our life company offices. We leased 75% of the floor area that we acquired.

Returns from the acquisition have been very good in terms of rental yield. It’s also proved a good move from an ALM perspective – the rental income has been a good match for our liabilities.

An added bonus is the unrealised capital gains we have from this acquisition. We are also open to Reits [real estate investment trusts] and equivalent assets, some of which are offshore investments.

Q How about other types of real assets, such as infrastructure?

A In certain markets we’re getting into infrastructure debt and project financing. We’re doing more of this as banks pull back from this space, and we can afford to hold these assets for the long term, typically 10 years or more. In terms of the ALM fit, infrastructure provides long-term, stable and steady cash flow and decent yield.

For example, we are invested in the South-North water-transfer project in China [a $62 billion government scheme to divert 44.8 billion cubic metres of water a year from the Yangtze River in southern China to the Yellow River Basin in arid northern China].

Each country’s operation [within Ageas] has a local team that will look at whether each infrastructure project is worth investing in.

Q So your allocation to alternatives has risen?

A Yes, in the past five to 10 years, our exposure to alternatives has probably at least doubled. Property and infrastructure form the biggest part of this exposure – combined, they can account for as much as 5% to 10% of our AUM.

Whether this continues to rise depends on the markets, but it’s performing well compared to the plain-vanilla assets. Hopefully the global economy will get healthier – if so, that won’t mean we close our alternatives portfolio, but we may look again more strongly at traditional assets.

Q Do you buy hedge funds and private equity?

A Typically we are not allowed to invest in hedge funds. They are allowed in Hong Kong, for example. The regulations are silent about this asset class in Malaysia, but the door remains open to insurers to seek approval for investments into hedge funds. Also, I think the Thai regulators are looking at this again.

In general, regulators in Asia are taking another look at what asset classes they should and shouldn’t allow.

If permitted, we would access hedge funds either directly or via funds of hedge funds – the benefit of the latter is that they have the expertise to select the best funds, and we don’t.

We invest in private equity both directly and through funds of funds.

Q How much do you use external fund managers?

A In Asia, with the exception of India, a fair amount of our assets are managed externally, but the amount depends on the country. We may have separate asset management firms in some markets.

For example, in India, the unit manages assets internally and uses no external firms.
If we don’t have much time or expertise in a certain area, we outsource investment. Government bonds, for example, we can do in-house.

Even for countries where we have a strong investment team, there are advantages to working with external fund managers.

When I ran Thailand [as head of investments at Muang Thai Life, an Ageas subsidiary], I would work closely with two or three fund managers. We would rather park funds with these firms than others, and we also use them for other things, such as sharing research ideas or contacting specialised players in certain areas.

Q How often do you change managers?

A Typically we might review an external manager every two or three years, but we’ve used some for more than five years. We don’t define a typical tenure length for a mandate, but give firms discretion to manage the portfolio according to certain risk/return aims and other parameters.

Q Do you use both mutual funds and segregated mandates?

A Yes, a mix of both. We don’t define the boundaries or exposure levels regionally in this respect; we leave that to the local teams.

We try to remain as open as possible in terms of allowing local teams to do interesting things. If we define or restrict them too tightly, we put them in a straitjacket; it makes their life more difficult – and more boring.

We don’t want them to play in just a small corner of the market. Our PMs should push themselves to look into how can best to improve on yield and duration of assets with respect to their local business’s policy-holder liabilities.