Prudential Asia building ETF and factor exposure

As the pool of passively managed assets grows ever larger and fees steadily fall, insurance firms in Asia are increasingly starting to buy or are upping their exposure to exchange-traded funds (ETFs), index mandates and factor-type investments.

Prudential Corporation Asia, for one, has been increasing its use of both traditional passive and multi-factor strategies as they have become more popular and liquid and therefore more attractive, said Stephan van Vliet, PCA's chief investment officer.

“We have increasingly used ETFs alongside our active strategies, and more so in Europe and the US [for exposure to those markets],” Hong Kong-based van Vliet told AsianInvestor last month. “They help us with our tactical calls.” 

Prudential’s Asian fund management arm, Eastspring, also announced a non-exclusive partnership to use BlackRock’s iShares products last year.

Similarly, Bangkok-based Krungthai Axa Life is looking to boost its allocation to foreign equities and feels passive or quasi-passive strategies would work "at this stage and for some markets", Pattarapol Parin, the joint venture's CIO, told AsianInvestor. "We are open to factor investing, and the team is studying this area to get more ideas about these strategies."

Asset managers confirm this is a clear trend.

“We’ve seen an increasing number of [Asian] insurance clients adopting passive vehicles in their investment book, throughout their portfolios,” said Sam Manchanda, Southeast Asia head of institutional business at DWS Investments, formerly Deutsche Asset Management.

They have been particularly keen to take up ETFs to make tactical investments in international markets, he told AsianInvestor.

And that is happening at a time when insurers in Asia Pacific have been ramping up their foreign exposure, driving a surge in investments outsourced to fund houses.

Singapore-based Manchanda said he has seen more and more new adopters of ETFs among insurers and institutions generally, as choice and liquidity levels have grown and as regulation changes allow such products to be used more.

Indeed, insurers in Asia have embraced ETFs earlier than their US peers in in many cases, said Deborah Fuhr, founder and managing partner of London-based research house ETFGI. This may be because the US insurance regulator, the National Association of Insurance Commissioners, has to approve the classification of ETFs on a case-by-case basis, she noted.

There’s also been definite interest in factor-type allocations among Asian insurers, said Manchanda. These strategies employ alternative index weightings other than the traditional market capitalisation approach with a view to achieving better returns.

As of end-July there were 7,847 exchange-traded products (ETPs) globally and 14,427 listings on 70 exchanges in 57 countries from 375 issuers, according to ETFGI. Global ETP assets have swelled by 5.6% in 2018 as of the end of July, and by 20.9% annually over the past five years.

Use of ‘smart beta’ or factor-based ETPs has grown even faster. They now have $659.5 billion in assets globally, up 8.7% this year and 33% annually over the past five years.

Certainly Prudential Asia has been using more equity styles to diversify its portfolio of roughly $100 billion and eke out more sources of alpha, including index and factor strategies.

“We’ve had a very long cycle where growth has outperformed value,” van Vliet said. “If you’re too tilted to value, it may hurt you, so you have to make sure that we appoint multiple asset managers to cope with this.”

However, PCA will tend to use active managers more for Asia and emerging markets, he added, because they have more opportunity to add value to such investments.

Asia market ETFs have underperformed the wider market for a number of reasons, including higher trading costs, lower liquidity and fees, van Vliet said.

In Asia, only the largest stocks are liquid enough for ETFs to buy, he explained. However, “in many markets in the region, it’s important to stay allocated in mid and small caps, as such stocks have outperformed the broader market.”

EUROPEAN TREND

The trend towards passive is also taking place in Europe.

“There is some interest in shifting away from active equity strategies, especially in developed markets,” said Andries Hoekema, global head of insurance at HSBC Global Asset Management. “Strategies where asset managers are trying to hit the ball out of the park seem to be less attractive to European insurers these days.”

HSBC Global AM has seen more use of both passive and quasi-passive systematic strategies such as factor-based investments, London-based Hoekema said.

Both of these types of approach lend themselves to a degree of structuring, he noted. For instance, target-volatility versions of passive and factor portfolios can help create more efficient hedging strategies in order to reduce the capital charge under Solvency II, the capital framework for insurers.

Such approaches are also becoming more interesting in Asia as new regulatory systems and higher equity capital charges loom in the region, Hoekema added, and as insurers there seek guidance from their European peers on how to respond.

For more insight on how investors are using ETFs, attend the 'Inside ETFs Asia' forum in Hong Kong on November 7. For more details, visit this link.

An in-depth feature on how and why Asian insurance firms are allocating appears in the latest (August/September) issue of AsianInvestor magazine.