China Life hirings seen as launch of global manager opportunities

A group of global investment managers has garnered the first flurry of mandates from China's largest life insurer since regulators opened the door for offshore investments more than two years ago.

Analysts see those hires as the tip of an iceberg that will come into view over the next five or six years.

China Life Insurance Co. Ltd., Beijing, with an investment portfolio of RMB1.97 trillion (US$315 billion), announced Dec. 20 that its board had approved three-year contracts for eight managers of overseas assets: five for multiasset class strategies and three for global equities.

The announcement didn't name the firms or provide details on the size of the allocations.

But over the past week, two sources, who declined to be named, identified the five multiasset class managers as: Goldman Sachs Asset Management, New York; J.P. Morgan Asset Management, New York; Neuberger Berman, New York; Schroder Investment Management Ltd., London; and State Street Global Advisors, Boston.

The same sources agreed that two of the three global equity managers selected were American Century Investment Management Inc., Kansas City, Mo., and Franklin Templeton Investments, San Mateo, Calif. They also said — but with a lesser degree of certainty — that BlackRock Inc., New York, was hired for passive global equities.

Analysts and money management executives said the allocations range from US$100 million to US$200 million each.

Spokesmen for GSAM, Neuberger Berman, Schroders, American Century, SSgA and BlackRock declined to comment. Spokesmen for JPAM and Franklin Templeton couldn't immediately be reached. Lan Yuxi, a Beijing-based spokesman for China Life, also couldn't immediately be reached.

Money management executives welcomed the news of the first big life insurance pickle coming out of the China jar — a jar with assets of US$1.63 trillion now, according to Z-Ben Advisors, a Shanghai-based firm that consults on financial markets business opportunities in China.

Chinese regulators in late 2012 allowed insurers to invest up to 15% of their general accounts offshore. In the interim, a few insurers have awarded a combined handful of broad advisory mandates to offshore managers. Some industry veterans believe China Life might have issued a mandate or two last year as well. But until now, none of the big insurers has been seen extending mandates to an array of offshore managers.

Only 1% to 1.5% of Chinese insurers' assets are invested offshore, with the bulk in real estate and a bit in Hong Kong-listed equities, noted Manuelita Contreras, a Singapore-based senior analyst with Cerulli Associates, who covers insurers in the region.

In a Feb. 19 interview, Peter Alexander, Z-Ben's managing director, said this round of China Life mandates — the outcome of an RFP process that began in early 2014 — marks a paradigm shift to a “far more streamlined, far more transparent” way of tapping third-party managers of insurance assets.

In the process, executives at the insurance giant have made it clear they expect their offshore managers to have an onshore presence to service those accounts. This should force managers to abandon the “fly-in, fly-out” approach to client service that has prevailed while the institutional investor landscape remained dominated by two or three big Beijing-based sovereign wealth funds, he said.

With the ice now broken, analysts and money managers predict a gradual increase in mandates from insurers over the coming year, followed by a more rapid acceleration.

Ivan Shi, senior manager of research at Z-Ben, said the next 12 months should serve as a trial period for China Life and, by extension, for the broader industry. If all goes smoothly, 2016 could prove an inflectionpoint, marked by an acceleration of offshore allocations in the years that follow, he said.

Some money management executives in the region concur. June Wong, Hong Kong-based vice chairman, Asia-Pacific, with Threadneedle Investments, and CEO of the firm's Hong Kong business, said in an e-mail that her team has noticed a recent pickup in the willingness of insurers on the mainland to “engage in discussions on international strategies.” She said she's “quite hopeful” that such interest among insurers will translate into a broader set of business opportunities over the next 12 to 18 months.

Mr. Shi said his team estimates that allocations by China-based insurers to global money managers could surge to US$290 billion by 2020, reflecting what a January Z-Ben report termed “a considerable unmet need for diversification and better risk management” for the country's large — and fast-growing — pool of insurance assets.

Others, while bullish long-term, expect more incremental progress for now.

Insurers in China need to put in place due diligence, compliance and manager-monitoring capabilities to facilitate material allocations offshore, noted Kimon Kouryialas, Singapore-based director and head of pan-Asia sales and client service with Martin Currie Investment Management Ltd.

With many still at an embryonic stage in those areas, getting to that point is likely to be a five- to 10-year story, he said.

Only global managers prepared to make a decades-long commitment to the Chinese market are likely to succeed, said Mr. Kouryialas. He added that Chinese insurers now “dipping their toes in the water” have mostly favored the biggest names in global money management when awarding mandates.

Z-Ben's Mr. Alexander said China Life's demand that its offshore managers have onshore client servicing capabilities will force global managers to make some strategic decisions.

He said he and his colleagues strongly believe offshore managers should set up wholly foreign-owned enterprises — a legal framework that became available a few years ago that provides the greatest latitude for pursuing new opportunities as China continues to open its markets to global competition.

“Over the next 18 months, anybody who's serious about China's institutional market will have to be here with a wholly foreign-owned enterprise,” structured and capitalized to “bake in the most optionality” for the global manager, said Mr. Alexander.

But one offshore manager in China Life's stable, who declined to be identified, pointed to the gray zones in China's regulatory approach to say it's not clear that an onshore presence will be a necessity.