Insurance CIO sees alts investment funds gain traction in India
Alternative investments are gaining momentum among institutional investors, enticing insurers to consider this asset class even as local public markets continue to shine.
“We are seeing good traction in the alternative investment funds (AIF) in India and the quantum of funds that they are mobilising and deploying," said Ajit Banerjee, CIO of Hyderabad-headquartered Shriram Life Insurance.
“AIF as an investment is still evolving in India, and thus, many new regulations are being issued to develop the industry in an orderly manner. A few of the insurers both in the life and non-life space have made some investments into AIFs either from the shareholders’ portfolio or from participating product portfolio," he added.
Shriram Life Insurance
Shriram Life Insurance, a joint venture between India’s Shriram group and South Africa’s Sanlam group, has about $1.3 billion in assets under management (AUM).
Shriram group is an Indian non-banking financial services provider with about $34 billion in AUM.
FIXED INCOME HEAVY
AIFs fall into three categories in India: category 1 focuses on startups and infrastructure; category 2 focuses on private equity funds, private debt funds and fund of funds, while category 3 covers investments in listed and unlisted derivatives.
Insurers can invest in certain AIF segments such as private equity and private debt funds and fund of funds.
They typically don't account for more than 2-3% of an insurer portfolio, according to industry experts.
Fixed income typically accounts for the predominant portion of any Indian insurer's portfolio.
On the insurance side, “we are predominantly a fixed income-oriented portfolio' 93% of our portfolio is invested in fixed income-oriented securities in duration required as per ALM (asset-liability management) position of the company and 7% of our portfolio is invested in equity shares,” said Banerjee.
“As we are a life insurer, it is required to match liabilities to asset management and "not the other way round," said Banerjee.
"The asset allocation calls are taken on the basis of our policy liability requirements, optimisation of the portfolio returns which are in turn taken based on our view on equity and debt markets, interest rates calls, etc,” he added.
EXPLORING ASSETS
AIFs have surged in popularity in India over the past decade.
These funds held investments worth about $47 billion at the end of December 2023, according to data from markets regulator Securities and Exchange Board of India.
Domestic investors accounted for up to 80% of the fund flows, compared to a decade ago when foreign investors made up the bulk.
Like most insurers, Shriram Life Insurance is cautiously exploring investment opportunities outside of conventional bonds and stocks.
“As part of our objective for optimising our portfolio return in a risk efficient manner, we will be looking forward to investing in Bond Forward instruments after they get the required regulatory approval,” Banerjee said.
Bond forward agreements are derivative contracts between two trading parties to buy and sell bonds at an agreed price and quantity in the future.
India’s central bank issued draft rules on bond forward agreements for sovereign debt in late December 2023. The launch date has not been decided.
Bond forwards are particularly helpful for long-term investors manage cash flows and tackle interest rate risk.
The central bank’s move to introduce bond forwards comes after exceptionally strong demand for long-term government securities from insurance companies, according to local media reports.
Shriram Life Insurance is also considering other forms of investments.
“We may also selectively invest in AIFs, INVITs [infrastructure investment trust], REITs [real estate investment trusts] if the investment opportunity passes our selection filters,” he added.
INVITs have become quite popular with international pension funds and sovereign wealth funds such as CPP Investments and Mubadala when investing in Indian infrastructure.
Image credit: Shutterstock
INDIA OPTIMISM
Global institutional investors are highly optimistic about India, with several noting the investment appeal, which Banerjee confirms.
"Overall, the Indian economy’s fundamentals are looking very strong,” he said.
“The key macro indicators are looking positive and there isn’t much stress building up on the macro side at this point of time. Indian economy remains much better placed than our western peers.”
However, he acknowledged that “India’s tale, while still one of growth, acknowledges the rural-urban divide and the challenges in agriculture, even as its manufacturing sector promises expansion.”
Globally, the spectre of recession, in varying intensity in different geographies, continues to cloud the investment outlook, said Banerjee.
“This intricate mosaic of investment outlook for 2024, with its blend of optimism and caution, illustrates a world at crossroads, navigating through the complexities of an interconnected economic landscape. “
“While some of the earlier headwinds continue to persist as we have entered 2024, the hopes of interest rate cuts, strong foreign portfolio investor inflows [for India] and perceived political stability would augment well going forward,” he added.
While markets are expected to be volatile and bogged down by profit booking and valuation concerns in the near term, the long-term fundamentals of Indian equity market appear stable and attractive, said Banerjee.
“In view of the expected volatility in the near term it is imperative to diversify across different asset classes,” he added.