Investment is not a 100-meter race, it’s a marathon!
Michelle Zhang, Head of the Investment Center at the China Life Insurance Company in Beijing, is emblematic of the new generation of youthful executives assuming leadership positions in the country’s burgeoning financial sector. China Life, which is 68% government-owned, is the country’s largest life insurance company, and together with its two subsidiaries, China Life Asset Management and China Life Pensions, it is one of the largest asset managers in China. Moreover, China Life Pensions is on track to become one of the world’s largest pension fund managers in the next year or two.
Zhang, who’s been head of the China Life Investment Center since 2016, oversees a portfolio with assets of about RMB 3.7 billion ($564 million) as of September 30, 2020 and a typical inflow of about RMB 30 billion ($4.57 billion) in new money each month. Chinese asset managers were once heavily reliant on foreign firms with expertise in asset allocation and investment selection, but executives like Zhang have been building their own increasingly sophisticated teams to construct and manage their investment portfolios. Domestic firms have had to learn fast as the rapidly expanding Chinese middle class has ratcheted up the demand for financial services, while the Chinese government has encouraged foreign financial institutions to compete in China’s domestic market.
In order to get a handle on China Life’s rapidly growing AUM, Zhang says, “We have divided our assets into three broad portfolios. The biggest and most important is the Fundamental Portfolio, which matches our liabilities, not only in terms of return requirements but also in cash flow and duration. The second portfolio, called the Risk Portfolio, aims to generate alpha and make a profit for the company on a yearly basis. The last-but-not-least portfolio is the Liquidity Portfolio whose function is to meet the need of everyday cash flow.”
She goes on to explain, “We are a life insurance company, so we have very large and long-duration liabilities, with different levels of guaranteed rates on our balance sheet. It’s our liability matching needs that shape our portfolio, so 70% to 80% is invested in fixed income assets, 10% to 15% in equities, and the rest in alternatives and liquid assets.”
Zhang adds, “Our fixed income portfolio is around 50% invested in government bonds, and the rest is in financial institution bonds and corporate bonds.” She notes that in China, “when we invest in government bonds, the income is tax exempt. So, if the 30-year government bond yield is 3.6%, taking into account the tax exemption effect, our net return is around 4.7%.” She adds, “Government bonds are very attractive assets not only because of their outstanding risk/return profile, but also because they provide a relatively long-duration which could help match our long liability durations.”
As for China Life’s investments in corporate bonds, Zhang says, “We remain vigilant about credit risk. About 98% of our corporate bonds portfolio is Triple-A rated.” China Life also has a footprint in private credit market, and there, too, Zhang says, “We always choose the very best quality names to invest in.”
Zhang says China’s economy has bounced back robustly from the COVID-induced lockdowns, but the pace of growth is expected to be slower than in the past, so the Bank of China is likely to keep interest rates at historically low levels in order to support economic growth. “For insurance companies,” Zhang says, “one of the greatest challenges we will face in this cycle is how to invest for income during a prolonged period of low rates.” Previously, she says, “We used leveraged repos to invest in bonds.” But as interest rates have declined, Zhang notes, China Life has moved away from leverage “to mitigate the impact of the downward trending interest rate environment.”
According to Zhang, “China Life has been building an increasingly larger alternative and real asset portfolio to try to solve for issues such as lower yield, and we have also been seeking yield in lower-quality assets. Private credit and private real estate are examples of alternative assets that have historically provided attractive income in a low-yielding environment.” She adds, “Given the interest rate environment, many of our counterparts in the U.S. and Europe, had already been moving into private equity, private debt, infrastructure, and real estate a long time ago.”
In constructing the China Life portfolio, Zhang explains, “We use a model to do the strategic asset allocation.” At that point, Zhang says, “More than 80% of the assets are managed by internal managers, while the rest is externally managed.” She adds, “These two types of investment managers play different roles. Most of the Fundamental Portfolio is managed by internal managers. At the same time, China Life has hired about 30 external managers to generate alpha for us.” But she emphasizes that “for tactical asset allocation and manager selection, most of the judgments come from our own team.”
Zhang notes that, “The China Life investment center manages a small offshore portfolio representing around 2% of total assets. To expand our global exposure step by step, we started to select international managers in 2014 to manage a $1.3 billion public equity portfolio, including global equity, multi-asset solutions, and European equity. We have invested with a number of top-tier foreign asset management institutions such as JPMorgan and Goldman Sachs Asset Management since then.” While China’s regulators permit insurance companies to invest up to 15% of their portfolio offshore, since China Life is still at around two percent, she says, “Without question, there’s a huge potential for us to allocate to global market in the future.” She adds, “Unfortunately, there are challenges that slowed us down. Our investment progress will largely depend on the government’s policies, geographic problems, and the political environment in the near future.” But “if condition permit,” Zhang says, she will keep on building her global portfolio.
Despite the interest in international investing, Zhang says China Life has much to do in its domestic market. She acknowledges that “COVID-19, continues to cause long-term damage to the global economy, and a full recovery will take years,” but meanwhile, “China has achieved some of the world’s lowest Covid-19 levels, and over the past year, our economy grew at almost 5%, while all the other major economies contracted.” She adds that “as a long-term investor, during the market’s panic-induced selloff, we identified a lot of attractive buying opportunities and invested in a number of high-quality equities.”
Going forward, Zhang says, China Life expects to emphasize three areas. First, they plan to keep on investing in long-term government bonds. Second, real assets, such as infrastructure assets and real estate assets, are particularly attractive under the monetary easing backdrop. “Although real assets account for only a small portion in our current portfolio, the return generation feature is very attractive for long-term investors,” she says. The third focus is “to allocate more to new investment theses, such as technology, healthcare, and elderly care businesses,” she explains, “Technology investments are of increasing interest because lifestyles are likely to change post Covid-19 pandemic. For example, COVID-19 accelerated the shift towards high-speed broadband usage at home. We believe that technology will play an even bigger role than it has in recent years.” Zhang also says, “One out of every five people in developed countries is aged 65 or older. In China, we see the same pattern. To seize the demographic trend, we need to invest in businesses that provide services for the old people.”
Zhang was born and raised in Beijing and went to university there. After graduating, she had two jobs in financial services before joining China Life in 2001. Initially she worked in the strategic planning and risk management departments, and in 2008 she was transferred to the investment management department.
These days, she lives with her husband in Beijing, while their son is a student at college in the United States. In her spare time, she says, “I’m kind of a boring person. I enjoy staying home and reading books or watching movies. Her taste in reading matter is eclectic; it includes novels and weighty nonfiction like “The Other Half of Macroeconomics and the Fate of Globalization,” by Richard Koo, the Chief Economist at the Nomura Research Institute. She recently read “What It Takes: Lessons in the Pursuit of Excellence,” by Steven Schwartzman, the chairman of Blackstone, and finds it inspirational: “He’s a humble person, and he’s achieved very good performance in the private equity area.” She notes that China Life Investment Center “has collaborated with Blackstone in many fronts, so I’m very interested in his career, and I want to learn from his experiences.”
As for other interests, Zhang likes to travel: She’s been to more than 20 countries, including not only a number in Asia but also a half dozen in Europe, and she’s visited a number of cities in the U.S. She’s also been to places where Chinese visitors are not very numerous, like South Africa and Israel. One reason she’s eager for the pandemic to subside: “I would love to continue my travels globally,” she says wistfully.
Meanwhile, she is shepherding China Life’s investment journey. “We always say, ‘For a life insurance company, investment is not a 100-meter race, it’s a marathon.’ We don’t care much whether we could win in the short-term: We aim to win in the long run.”
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