FTLife Deputy CIO flags need to recognise public-private asset relationship in portfolios
The world of insurance investment is a complex and ever-evolving one, and companies like FTLife Insurance, which manages over $10 billion in assets, are using their experience to better navigate the growing investment trend towards private markets, according to Carol Mo, deputy CIO at FTLife Insurance.
“Understanding the correlations between private and public assets is crucial for building a diversified portfolio that can withstand large market fluctuations, as witnessed during the Covid-19 pandemic,” Mo said at a panel discussion at AsianInvestor’s Insurance Investment Briefing on March 19.
FTLife Insurance
While private assets have a better reputation for staving off devaluation during times of high volatility, due to a perceived low correlation to public market valuations, Mo said this perception is not quite the reality.
"What we have witnessed is that — in extreme market conditions — the correlation between the price of the public asset and the private asset can be quite high,” she said.
When considering the construction of an investment portfolio for these volatile climates, Mo suggests insurers take a hard look at their existing portfolios to more strategically diversify their exposure.
"For example, if your existing portfolio has a lot of weight in the biotech sector, when constructing your private market portfolio, you should put less focus on biotech sector-related private equity or private debt,” said Mo.
Partnering with skilled managers who can steer through various economic conditions is also crucial for mitigating risks.
“Always look for a manager who can help you and who has a track record to navigate across different economic cycles to manage the downside risk of your assets, even in the private markets," she said.
POST-PANDEMIC INFLUENCE
On the same panel, Fred Nada, partner at Arcmont Asset Management — a private debt-focused investment specialist — expanded on how the recent pandemic has impacted private debt portfolio companies, and the consequent shifts in their investment focus.
Nada reflected on the nature of the companies that tend to form the bedrock of private debt portfolios, emphasising a preference for leading businesses with strong market positions and consistent cash flows that are generally non-cyclical.
Arcmont Asset Management
"What we saw during Covid was that quite a few of the businesses actually weren’t negatively impacted, and many actually did better during this period," Nada told AsianInvestor’s audience.
He cited examples of companies providing software for healthcare or IT services that remained critical and even thrived during the pandemic.
However, Nada acknowledged the challenges faced by some of his firm’s other portfolio companies.
“There were businesses, however, that really couldn't operate because they relied on face-to-face interactions, which were severely curtailed by government restrictions,” he said.
The pandemic forced a shift in investor focus towards liquidity and the fundamental viability of businesses, he said.
"During that time, we were very focused on cash liquidity and businesses that had good support from their shareholders, from the lenders. There were instances where if you look at history, performance really collapsed over a period of six to eight months. But for us, the focus was: Is the business liquid, and does the business reason to exist change?" said Nada.
The resilience of businesses was tested and, at least in Arcmont’s portfolio, those with robust support structures and a clear purpose weathered the storm, eventually rebounding to pre-pandemic performance levels.
LESSONS LEARNED
Reflecting on the lessons learned from Covid, Nada highlights how each new crisis reshapes the company’s credit analysis and underwriting processes to better accommodate new forms of risk.
"After Covid, we now incorporate the possibility of pandemics into our portfolio risk assessment more than ever before, as well as other market risks,” he said.
“In addition to pandemics, recent challenges like inflation and geopolitical events such as Brexit have been incorporated into our risk assessment models, ensuring that investment strategies remain robust and responsive to potential new challenges.”