Singlife CIO reveals return expectations from private assets
Singlife, a Singapore-headquartered life insurer, believes asset owners will extend the hunt for private market investments to generate higher and better returns for their stakeholders while keeping risk at manageable levels.
Even after the steep declines in public stocks and bonds in 2022, which prompted a consequent revaluation of private market assets, private investments are appealing to investors because of their potential for delivering strong long-term returns, Kim Rosenkilde, chief investment officer of Singlife, told AsianInvestor.
“Overall, the alternative space covers a wide spectrum, so the returns can range from 7% to higher [than] 20%, although these come with varying risk levels,” said Rosenkilde.
RELIABLE MANAGERS
“Our managers in alternatives, and those involved in decarbonisation, are talking north of 20%,” he added.
Interest in alternative assets has been sustained for a few years now, both due to their higher returns and in particular because alternatives help investors ride out volatility, said Rosenkilde.
“There is a lot that can be done to decrease volatility, which has a lot to do with the selection of managers,” he noted.
Singlife manages some funds internally but most of its funds are managed externally. Rosenkilde is a firm believer in selecting robust and reliable managers to deliver strong investment returns.
The CIO said he hopes to continue adding more managers to the list this year. “We also want to continue with the energy transition [theme]. Of course, it’s not going to be overly concentrated in our portfolio, but it’s something that we’re still looking at,” he said.
Singlife is just one among a host of asset owners across the region that have embraced alternatives investing to enhance returns.
Most asset owners with long-term liabilities of a few decades have to first tend to asset-liability matching needs and then attempt to generate extra returns from what is left.
ALTS APPEAL
Cognisant of rising interest in alternatives, Singapore has undertaken several efforts to build up private market capabilities. Several global alternative asset managers have set up offices in the city state in recent years.
More than half of the top 50 global alternative asset managers and about 40% of the top 50 global hedge fund managers set up offices in Singapore at the end of 2022, Lim Cheng Khai, executive director of the Monetary Authority of Singapore’s financial markets development department said at an alternatives forum on March 28.
“A number of them also have their APAC or Southeast Asia hubs with senior regional leaders based here, and built their investment, value creation and other capabilities in Singapore,” Lim said.
Rosenkilde believes this year, multi-asset hedge funds are likely going to have a good year – a view shared by other asset owners, including Singapore’s central bank.
While hedge fund performance fell 4.2% in 2022 according to the widely tracked HFRI 500 Fund Weighted Composite Index, some strategies such as macro posted gains in the mid-teens, driven by fundamentals and trend-following commodity and quantitative strategies.
“There remain opportunities to generate good returns with hedge fund strategies even in turbulent markets,” Lim said.
STRATEGY RETHINK
Private markets continue to attract investors even as valuations adjust after the 16% to 20% drop in public stocks and bonds in 2022. Meanwhile, US interest rates have adjusted upwards from close to zero between the global financial crisis of 2007-2008 until last year, to about 5% now.
“Over the past 14 years or so, the cost of money, or the discount factor, has been basically zero. Now the discount factor is not zero, it’s at least 5% minimum [US fed funds rate], which affects the valuation of assets significantly. Assets have to be repriced and that is clearly happening and has happened in the last year,” said Rosenkilde.
“Entire industries have benefitted from the almost zero cost of money, whether that is private equity or private credit.”
“Had you not been exposed to private equity in the past decade or so, you would have missed out on some tremendous returns. And a lot of private credit has seen no default rates. Of course, when the price of money goes up, the situation can change,” he added.
BNP Paribas
With higher interest rates, return expectations across asset classes are changing. Some insurers recently told AsianInvestor that they are rethinking their alternatives strategies.
“People are coming to terms with the fact that there is now a government-guaranteed security that yields 4-5%.
"And that’s a decent return especially when you consider you have to hold that return up against what you would make in an asset that has risk involved, such as equities,” said Rosenkilde.
He maintains, however, that even as private markets adjust, they will continue to attract institutional and other investors.
Other industry experts echo that view: "Even while there is a more normalisation of interest rates, I would say we still see a lot of enthusiasm in private capital, even though getting high yield is generally achievable now with traditional investments,” Franck Dubois, APAC CEO for BNP Paribas Securities Services, told AsianInvestor.
He agrees that returns on some private market strategies continue to deliver returns north of 20% -- much higher than what can be achieved in public markets.
PRIVATE CREDIT IN FOCUS
Private credit, for instance, remains in focus despite recent financial market turbulence triggered by the collapse of Silicon Valley Bank and the takeover of Swiss bank Credit Suisse by UBS.
Singapore’s MAS has also identified private credit as a key growth area.
The asset class is still relatively nascent in Asia compared to the US and Europe, according to the MAS’s Lim. Assets under management in the APAC region are expected to growth at CAGR of 9% until 2027, Lim said, citing data firm Preqin.
“Fundraising for private credit funds finished the year on a strong note, surpassing $200 billion for the third consecutive year. Total private credit AUM grew 12% to about $1.4 trillion in 2022,” Lim noted.