Taiwan Life plans spree of offshore mandates

Taipei-based Taiwan Life aims to outsource some $200 million of its overseas equity investments in the coming 12 months and to raise its foreign bond exposure.
Taiwan Life plans spree of offshore mandates

Taipei-based Taiwan Life aims to boost its use of foreign asset managers for equity investments almost tenfold in the coming year and to raise its exposure to offshore bonds, chief investment officer Alex Liu told AsianInvestor. The insurer is also planning to double its alternative asset allocation, as reported.

The firm, with NT$1.1 trillion ($35 billion) in AUM, has two overseas equity mandates – both growth dividend strategies – accounting for 2.8% of its foreign stock portfolio. It plans to raise that proportion to as much as 25%, or $216 million, in the next 12 months, though the amount may vary depending on market conditions. Equities accounted for 7.7% (3.3% domestic, 4.4% overseas ) of total AUM as of June 30. 

Taiwan Life is already in talks with some foreign asset managers about the planned new mandates, noted Liu. 

“We are familiar with Taiwan and Greater China region,” he said, “but beyond that, in the US and Europe, we don’t have a hundred people on the ground, no first-hand information or research reports from local investment banks, so we need trustworthy asset managers to help us manage assets in those local markets.”

The firm handed out both of its current offshore equity mandates this year, Liu added, without giving names of the managers or sizes of the mandates. It previously managed all of its foreign stocks in-house.

The need for yield is such that Taiwan Life is lining up foreign equity mandates despite taking the view that global stocks are expensive and following the announcement of new risk-based capital (RBC) ratios last month, which will raise the cost of such investments (see table below).

The change of risk-capital ratios for Taiwanese insurers' equity investments (as of August 2)
Type of equities New formula Old formula Change
Stocks listed on domestic exchange Half-year average stock price ×0.2165×β〞 Half-year average stock price×0.2274×β -5%
ETFs investing in stocks listed in domestic exchange The half-year average stock price×0.2165×β〞 The half-year average stock price×0.2274×β -19%
Common stocks traded over-the-counter The half-year average stock price×0.3×β〞 The half-year average stock price×0.3000×β +0.4%
Developed-market stocks (including ETFs) The half-year average stock price×0.2009 The half-year average stock price×0.1884 +6.6%
Emerging-market stocks (including ETFs) The half-year average stock price×0.2887 The half-year average stock price×0.2485 +16.2%

Source: Taiwan’s Financial Supervisory Commission

βis the systematic risk of an individual stock in a stock price weighted index; β〞is the systematic risk of an individual stock in a stock return weighted index

Global fundamentals are not good at the moment, said Liu, and yet stock market valuations are high. So the firm is likely to allocate more to equities when foreign share prices return to a more reasonable range, he noted.

Moreover, there are now other incentives to invest locally, he added. The new rules reduce the RBC ratio  the amount of capital insurers must hold to make certain investments  for domestic stocks and exchange-traded funds, while increasing those for foreign equities.

That said, insurers are still likely to invest in particularly attractive EM stocks or sectors, despite the higher capital cost, Liu said.

China is a good example. Taiwan Life bought onshore mainland bonds through the qualified foreign institutional investor (QFII) scheme, through mandates given to Chinese asset managers. But given the depreciation of the renminbi in the second quarter of this year, the insurer has taken profits on some mainland bonds and bought more mainland equities, both through its in-house team and via external mandates, Liu said.

Eyeing foreign bonds

Taiwan Life is also planning to boost its offshore fixed income allocations, likely continuing its focus on investment-grade developed-market bonds, with a view to boosting returns, in line with its domestic peers.

The firm will consider awarding more overseas mandates, but its internal guidelines limit it to a maximum of 10% of its overall fixed income exposure, Liu said. As of July 31, 2.9% of Taiwan Life's bond investments were managed externally. 

As of June 30, some three-quarters (73.9%) of the insurer's AUM was in fixed income, chiefly overseas debt (57.6% of total AUM). 

Taiwan Life wants to allocate more to overseas fixed income and high-dividend equities with a view to boosting its recurring income, Liu said. 

About 75% of its investment returns are from recurring income (i.e. not from one-off gains, such as from capital appreciation). “We hope that by asset allocation to bonds and stocks that offer good dividends, by the year end, the percentage can go up to 80%,” said Liu.

Investment-grade corporate bonds account for about 97% of the firm’s bond portfolio, with most of those listed in the US and Europe, and rated A- or higher. 

This year Taiwan Life started to buy international bonds listed in Taiwan – as of June 30, they accounted for 5%, or NT$55 billion, of its overall portfolio.

In addition, the firm looks at mortgage-base or asset-based securities, which offer yields similar to those of 10-year bonds but only have three- or five-year terms, so have better liquidity, Liu said.

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