"Godfather of Insurance Asset Management" Duan Guosheng: Dividend assets are an important direction for insurance asset allocation

In China's insurance asset management industry, Duan Guosheng of Taikang Asset has a "remarkable" industry status.

He was born in August 1961, is 64 years old this year, and has worked in the insurance asset management field for a full 30 years.

His first job was at Ping An, where he joined in 1995 and held positions such as Director of the Financial Management Office, Secretary of the Chairman's Office, Assistant General Manager of the Investment Management Department (acting), Member of the Executive Committee, Head of the Investment Management Center, and Assistant Chief Investment Officer and Guiding Expert of the Ping An Postdoctoral Workstation. He is a pioneer, executor, and manager of early insurance asset management business.

In 2002, Duan Guosheng made a "stunning leap" by joining Taikang Insurance, gradually rising to the position of Executive Vice President and Chief Investment Officer. After Taikang Asset was established in 2006, his focus shifted to Taikang Asset, where he played a key role in driving the growth of Taikang Asset's scale to exceed 4 trillion, consistently ranking among the top three in the industry. In 2024, Duan Guosheng will step down as Chairman of Taikang Asset but will continue to serve as the company's CEO.

Duan Guosheng also has a significant subtle influence in the asset management industry, with his students and friends spread throughout the market, and his investment ideas are valued and referenced by many professional institutions. To some extent, he has an almost "big brother" type of charisma in this circle.

Recently, he published a column in the industry journal "China Insurance Asset Management," elaborating on his comprehensive thoughts on the latest challenges facing the insurance asset management industry and how to respond to them.

Key Quotes:

1. Relying solely on fixed-income assets can no longer meet the requirements of life insurance liabilities and sustainable corporate development. In the face of new situations, insurance funds must pay more attention to the value of equity asset allocation.

2. The goal of equity investment by insurance funds should be to achieve moderate returns, striving to reduce drawdowns, lower volatility, and improve the stability of investment returns.

3. Dividend assets, characterized by relatively low volatility and substantial dividend returns, are an important direction for long-term life insurance fund equity allocation.

4. By selecting high-quality listed companies with industry competitiveness and the ability to maintain high dividend payouts, a balanced asset portfolio can be constructed to enhance the risk-adjusted return level of the portfolio.

5. Taikang Asset has explored the establishment of an industrial chain research system and a matrix research team, actively uncovering investment opportunities in individual stocks with stable fundamentals and dividend attributes in industries such as consumption, pharmaceuticals, and the internet.

6. Focus on the research and allocation of dividend stocks in the Hong Kong market, leveraging the advantages of both Beijing and Hong Kong, improving the joint mechanism for dividend research, promoting strategy framework collaboration, and capturing strategic allocation opportunities.

Strengthening Stock Investment by Insurance Funds is an Inherent Demand

Duan Guosheng begins by pointing out that insurance funds relying solely on bonds (fixed income) can no longer meet the requirements of life insurance liabilities and development; currently, there is a need to "pay more attention to the value of equity (stock) asset allocation."

He first calculated an account:

In recent years, the domestic interest rate center has continued to decline, with the 10-year government bond yield falling below the previous 20-year range. The yield on the 30-year government bonds, which are the main allocation for insurance funds, has dropped from over 4.3% in 2018 to around 1.8%. At the same time, the supply of traditional high-yield assets is relatively scarce, and the proportion of non-standard assets in investment portfolios continues to decline After the "three-pronged approach," the difficulty of matching the cost and return requirements of insurance funds has significantly increased.

Although relevant departments have actively supported life insurance companies in various ways to reduce costs, the asymmetry between the liability cost of life insurance funds and the declining yield of asset allocation is influenced by factors such as the relatively high proportion of renewal premium scale.

Duan Guosheng thus concludes:

Relying solely on fixed-income assets can no longer meet the return requirements for life insurance liabilities and the sustainable development of life insurance companies. In the face of new circumstances, insurance funds must pay more attention to the value of equity asset allocation.

In other words, the era of making money by simply holding government bonds is over; insurance funds must find ways to earn higher returns.

Conditions for "Long Money Long Investment" for Insurance Funds

So, is there a better way to meet the increasingly high return requirements and increase avenues for stock investment?

The answer is yes.

Insurance funds are gradually improving their institutional and market environments.

Duan Guosheng pointed out that for a long time, insurance funds investing in equity assets faced multi-dimensional constraints such as proportion regulation, solvency, financial statements, and assessment mechanisms, leading to a relatively slow increase in the allocation ratio of equity assets.

However, in the past year, relevant parties have promoted state-owned insurance companies to adopt measures such as long-cycle assessments of more than three years through the release of the "Implementation Plan for Promoting Long-term Funds to Enter the Market," leading the entire industry to further improve the long-cycle assessment mechanism and increase the scale and proportion of equity investments.

At the same time, high-quality listed companies are increasingly valuing their own worth, with the scale of share buybacks by listed companies reaching a historical high in 2024. In the past two years, the total amount of "dividends + buybacks" in A-shares has exceeded the total financing amount, providing long-term support for the intrinsic value of quality companies.

In addition, the Central Huijin Investment Ltd. has become an important force for market stability by playing the role of a quasi-stabilization fund, with ETF holdings expected to exceed one trillion yuan by the end of 2024, significantly boosting the scale of passive broad-based ETFs. Furthermore, medium- and long-term funds such as insurance and social security are accelerating their entry into the market, forming a synergy that makes long-term fund allocation behavior more stable, with the value of stable return dividend assets as the base allocation being recognized.

Duan Guosheng concludes that increasing the proportion of equity allocation for long-term funds is expected to yield considerable long-term returns, achieving a virtuous interaction between the stable operation of the capital market and the stable returns of insurance funds.

How Should Insurance Funds "Increase Positions" in the Stock Market?

With the direction set, what strategy should insurance funds adopt to "increase positions" in the stock market?

Duan Guosheng proposed the following points:

First and foremost, the equity investments of insurance funds must focus on enhancing the stability of investment returns. Insurance funds follow an asset allocation model of "fixed income +," while equity assets offer better long-term returns but with greater volatility. Therefore, under the new circumstances, the equity investments of insurance funds must adopt multiple measures to enhance performance stability and improve risk-adjusted investment return levels.

Specific measures can include:

Dividend assets, which have relatively low volatility and considerable dividend returns, are an important direction for the equity allocation of long-term life insurance funds.

Select high-quality listed companies with industry competitiveness that can maintain a high dividend capacity, constructing a balanced asset portfolio that can obtain stable dividend income while enjoying long-term corporate growth, thereby enhancing portfolio stability and risk-adjusted return levels Explore diversified investment models and actively engage in long-term investments through FVOCI and private equity funds.

Seizing Business Opportunities from New Accounting Standards

Duan Guosheng pointed out that under the new circumstances, insurance funds are actively exploring diversified long-term investment models. For example, establishing private equity securities funds to conduct long-term investment pilots is also an important exploration of innovation in the long-term investment model of insurance funds.

By the end of 2024, the total allocation scale of FVOCI stocks for seven listed insurance companies (China Life, Ping An, CPIC, NCI, PICC, CHINA TAIPING, SUNSHINE INS) will exceed 500 billion yuan.

The aforementioned investments account for an average of 13.8% of the equity investments of relevant institutions, becoming one of the important models for insurance fund equity investments, with further room for improvement in the future.

Duan Guosheng noted that only holding period dividend income is included in profit and loss, and insurance institutions tend to choose targets with higher dividend returns. Such investments need to have higher holding stability (e.g., holding period exceeding 6 months) and lower turnover rates (e.g., not exceeding 10% within 6 months).

"Therefore, FVOCI also represents an investment model oriented towards long-term investment and long-term assessment, requiring the investment team to have a deeper understanding of the long-term value and quality of the target company," he summarized.

Dividend Assets and Insurance Fund Portfolios Complement Each Other

Duan Guosheng further explained the "positioning" issue in the process of life insurance funds investing in dividend assets.

In general, within equity assets, there are different styles and sub-strategies such as large-cap, small-cap, value, and growth. Although equity assets exhibit the characteristic of moving together in absolute returns, there is still a certain degree of negative correlation among different categories of assets such as large-cap broad-based, value dividends, high quality, growth, and small-cap broad-based in terms of relative returns, showing different return-risk characteristics.

In this regard, Duan Guosheng provided an explanation:

"The volatility and drawdown of dividend assets are relatively small, making them more resilient during bear markets; growth targets exhibit significantly higher volatility and drawdown, but have greater elasticity during periods of increased market risk appetite. By balancing the allocation of various equity sub-strategies, it is possible to reduce the overall volatility of equity assets to a certain extent."

Expanding Research on Dividend Industries and Individual Stocks

Duan Guosheng pointed out that in the process of building the equity investment system of the insurance asset management team, it is essential to "solidify dividend asset research and enhance the cognitive ability regarding dividend assets."

On one hand, it is necessary to improve the research methodology and analytical framework for dividend strategies, creating a "mid-to-long-term value comparison and selection system for dividend assets," based on internal rate of return (IRR), discounted cash flow (DCF), and mid-term industry prosperity analysis, to achieve value tracking and comparison of dividend sub-sectors.

On the other hand, it is important to "expand" research on dividend industries and individual stocks, exploring investment opportunities in stable fundamental stocks with dividend attributes in industries such as consumption, pharmaceuticals, and the internet.

He particularly emphasized the need to strengthen industrial research and build a matrix research team. Taikang Asset has already explored the establishment of an industrial chain research system and a matrix research team to provide solid research support for the optimization and implementation of equity investment strategies In addition, focus on the research and allocation of dividend stocks in the Hong Kong market, leveraging the advantages of both Beijing and Hong Kong, improving the joint mechanism for dividend research, promoting the synergy of strategy frameworks, and capturing strategic allocation opportunities.

Clearly, as insurance funds begin to "embrace" A-share assets more actively than before, more reform measures that can "affect the whole body by pulling one hair" are being advanced