Based on a proprietary survey of 50 Chief Investment Officers (CIOs) who oversee nearly $7 trillion in assets under management, the report examines how leading insurance industry CIOs are optimizing their portfolios in today’s low-yield environment and positioning themselves for future success.
McVey asserts that thoughtful asset allocation, including bigger thematic investing tilts, will become key differentiators in a world of excess savings amidst lower expected returns. To position themselves for success in the low-rate environment that will likely persist over the next five to ten years, insurance company CIOs need to take a more innovative approach to sustaining returns:
“Now is the time for insurance executives to dream big,” said Henry McVey. “The opportunity to create scale advantages in sourcing, portfolio construction, and risk management can accrue outsized economic ‘rents’ that should offset ongoing spread and rate pressures. As part of this process, we see a continued migration towards non-traditional products that can offer both enhanced returns and improved diversification.”
Primary findings from the report include:
- Intensifying interest rate pressure will keep pushing average investment yields down. Survey participants saw their average investment yields slip to 3.2% in 2021, down from 4.2% in 2017. The GMAA team does not see portfolio yields increasing until 2023.
- The Yearn for Yield will continue. Given the strong technical picture uncovered as part of the survey, the GMAA team is lowering their 10-year interest rate forecast from 1.75% to 1.5% for 2021 and 1.75% from 2.0% in 2022.
- CIOs have made substantial changes in their asset allocation to offset the negative impact of Quantitative Easing. Non-traditional investments account for 31.8% of survey respondents’ portfolios versus 20.3% in 2017.
- The shift towards alternatives is far from over. A net 48% of respondents said they intended to increase their allocations to Private Equity, a net 60% planned to increase allocations to Infrastructure and a net 48% planned to do so for Private Credit.
- Outsized monetary policy is the key concern for CIOs. Two-thirds of respondents cited inflation/deflation as their most worrisome macro risk factor.
- Further differentiation will accelerate a notable change in the competitive landscape of the global insurance industry. Scale players that can embrace complexity will be best positioned for success, as will those that embrace innovation, and can effectively invest behind mega themes like complexity, the global energy transition, and digitalization.
Links to access this report as well as an archive of Henry McVey’s previous publications follow:
- To read the latest Insights, click here.
- To download a PDF version, click here.
- For an archive of previous publications please visit www.KKRinsights.com.
About Henry McVey
Henry H. McVey joined KKR in 2011 and is Head of the Global Macro and Asset Allocation team. Mr. McVey also serves as Chief Investment Officer for the Firm’s Balance Sheet and oversees Firmwide Market Risk at KKR. As part of these roles, he sits on the Firm’s Investment Management & Distribution Committee and the Risk & Operations Committee. Prior to joining KKR, Mr. McVey was a managing director, lead portfolio manager and head of global macro and asset allocation at Morgan Stanley Investment Management (MSIM). Learn more about Mr. McVeyhere.
KKR is a leading global investment firm that offers alternative asset management and capital markets and insurance solutions. KKR aims to generate attractive investment returns by following a patient and disciplined investment approach, employing world-class people, and supporting growth in its portfolio companies and communities. KKR sponsors investment funds that invest in private equity, credit and real assets and has strategic partners that manage hedge funds. KKR’s insurance subsidiaries offer retirement, life and reinsurance products under the management of The Global Atlantic Financial Group. References to KKR’s investments may include the activities of its sponsored funds and insurance subsidiaries. For additional information about KKR & Co. Inc. (NYSE: KKR), please visit KKR’s website at www.kkr.com and on Twitter @KKR_Co.