The attraction of emerging markets
Richard Glenn, head of EMEA Insurance Distribution and Strategy at Invesco, says there is rising interest from insurers in emerging markets assets – and with good reason as they can offer diversification benefits, whilst potentially increasing risk-adjusted returns.
Are insurers becoming more interested in emerging markets assets?
Increasingly, our insurance clients answer yes to that question, and this is an area they want to allocate some of their fixed income investment portfolios to. The reason is that in this low-rate environment, with the burden of Solvency II, insurers are increasingly looking for sources of yield away from domestic or developed markets listed fixed income. There are different ways they can do this. They can go down the illiquid, more private asset route - or they can seek areas of relative yield in alternative fixed income. That is where emerging markets debt currently fits in; particularly investment grade emerging markets debt. The emerging markets debt space is considered a large investable market, so it offers investors an opportunity to diversify significantly. Rather than a UK insurer being heavily invested in BBB UK corporates, an insurer can achieve diversification and higher returns with investment grade emerging markets debt, and they can do it via Invesco.
How is Invesco innovating in the emerging markets space?
We offer emerging markets assets and expertise across a full range of capabilities, from both hard and local currency debt, ETFs, and our emerging markets equities. We have one of the largest emerging markets teams in the world with nearly $58bn of assets under management, and have been doing this for almost 25 years. We are constantly seeking to innovate in partnership with our insurance clients, particularly around customised buy-and-maintain debt portfolios. We have been leaders in creating customised client solutions with a low turnover and long-term orientation within the hard currency emerging market debt space. This is an attractive option for insurers as it provides more targeted access to the asset class than an off-the-shelf solution in a very efficient manner. Another aspect that makes us stand out is our deep on-the-ground expertise globally and our ability to research these companies and the socio-political issues facing jurisdictions. We acknowledge that unexpected events can and will occur. As such, across all of our strategies, we seek to maintain highly diversified and balanced portfolios at all times. This approach has allowed us to weather bouts of market volatility and take advantage of the ensuing market dislocations.
What are insurers looking for from emerging markets assets?
They want to understand, for a given risk tolerance – both in terms of risk and Solvency II capital risk – whether we can deliver them a more diversified portfolio that will potentially provide them better economic value than purely developed markets. The interest from insurers in emerging markets assets is undoubtedly increasing. However, insurers are being selective too. For example, many will want to understand potential FX risk, the relative risk assessment of sovereign and corporate exposures and some will often have a view on excluding one or more specific countries within the portfolio.
How much extra yield can investing in emerging markets typically generate for insurers?
We think that segment of the market is particularly compelling as you can potentially earn attractive long-term returns above that of similarly rated developed market bonds while maintaining a similar risk profile. In addition, given the growth and varied composition of the emerging market hard currency debt space, we think it also offers investors a very broad set of opportunities with diversification benefits.
How is environmental, social and governance (ESG) considered in the emerging markets space?
Our insurance clients are very interested in ESG integration across all assets. We think there are a couple of key considerations here. First, if you want to have the greatest impact in terms of driving change via ESG investing, emerging markets is the place where you can have the greatest impact, as the ESG starting point for most emerging market countries and companies is far lower than in the developed world. From an investment performance standpoint, we find that a focus on ESG factors can help drive better performance as the transparency and governance required for good ESG performance result in a better run company.