Dialogue with Deng Bin, Chief Investment Officer of Ping An: How over 5 trillion insurance funds are managed

In August 2024, Ping An released its semi-annual report, with a 6.8% year-on-year increase in net profit attributable to shareholders, and an annualized operating return on net assets of 16.4%. The interim dividend remained stable. Achieving this performance in the challenging and ever-changing macro environment in the first half of the year was not easy.

At the same time, the investment business once again became one of the "highlights". With a prudent asset allocation strategy, forward-looking extension of duration gaps, opportunistic allocation of long-duration bonds, and a series of operations, Ping An's investment portfolio of over 5 trillion yuan achieved a comprehensive investment return rate of 4.2% in the first half of the year, a 0.1% increase year-on-year against the trend.

How was such investment performance achieved?

What investment methods and philosophies lie behind it?

What are the investment strategies and allocation goals for the next stage of Ping An Group?

These questions led us to interview Deng Bin, Assistant General Manager and Chief Investment Officer of Ping An.

Prepare for Battle Before Engaging in War, the Essence of Art of War

Q: Ping An Group's investment performance this year has been quite outstanding, with a rising return rate. What investment principles do you follow when making specific investment layouts?

Deng Bin: Our investment principle is called "strategic stability, navigating through cycles; tactical flexibility, preparing for the future; balanced allocation, risk diversification". The most important are the first eight words, "strategic stability, navigating through cycles". Strategic asset allocation is the core link in the value chain allocation, followed by tactical allocation, and then security selection.

We firmly build strategic asset allocation from the perspective of navigating through cycles, which means we need to analyze and calculate the investment characteristics of all major asset classes for over ten years. This includes the long-term performance of major asset classes and their correlations, as the volatility and correlations of these assets determine the overall portfolio risk. Combining these with liabilities, we form Ping An's long-term asset allocation strategy.

In the process of forming long-term asset allocation, our core risk preference indicator is solvency. Solvency includes various risk factors such as assets, liabilities, operations, etc. It is the most comprehensive risk indicator, more comprehensive and instructive than any single risk indicator. The portfolio we construct must meet the requirement that under stress tests, the solvency indicator is higher than the internal standard, which in turn should be higher than the regulatory bottom line standard.

With the guidance of strategic asset allocation, it becomes the "strong traction" of the entire portfolio. The proportion of Ping An's major asset allocation must move around the neutral allocation level of strategic asset allocation, and the amplitude of this movement is determined by risk preferences. The maximum fluctuation range can be calculated scientifically. Even over ten or twenty years, the proportion of a major asset class in our allocation will not undergo reactive changes due to sudden market bull or bear switches.

Q: On a tactical level, what did Ping An do right this year? What challenges did you overcome?

Deng Bin: In the long-term process of portfolio management, whether to make more tactical judgments is also very important. Our tactical judgments this year were based on our medium to long-term judgments on economic and market cycles in recent years A few years ago, we predicted that with the further deepening of aging and the transition of China's economic structure, there would inevitably be a process of declining market interest rates.

Therefore, Ping An has been over-budgeting for long-term interest rate bonds every year since a few years ago. The bond rates we invested in that year were much higher than they are now, which has laid a solid foundation for us.

When we anticipated the decline in interest rates, we also saw the unique advantages of the Chinese economy, with many large state-owned enterprises distributing dividends very well. The underlying cash flow of these large enterprises is very stable, their business is very good, and their market valuations in terms of PE and PB ratios are very low. As a result, their dividend yields are very high, and their stock prices have good potential resilience to declines.

Therefore, we have been long-term holders of many large bank stocks for many years. Since last year, we have started to strategically invest in various large state-owned enterprises, not only in banks but also in energy and telecommunications industries. This strategic investment allocation accounts for about half of our equity assets. As a result, for the past three years, our equity investments have significantly outperformed the Shanghai and Shenzhen 300 Total Return Index. With our large capital size, such returns are satisfactory.

In terms of investment, I have always liked two ancient sayings. One is from "The Art of War" by Sun Tzu, "Use the normal to engage, use the extraordinary to win." The other is from Yue Fei, "Arrange troops before engaging in battle, this is the essence of military strategy; the subtlety of tactics lies in a single-minded focus." Applied to investment, it means that we need to foresee and predict macro trends, rather than react after policies are announced.

By adhering to investment discipline and balanced allocation while also to some extent predicting macro trends, we have the opportunity to make counter-cyclical investment allocations and achieve tactical excess returns. This is the characteristic of our tactical investment allocation.

Patience for the Long Term

Q: The liability cycle of insurance funds determines that it is a form of long-term and patient capital. How does Ping An view the role of patient capital? How does it fully leverage the advantages of long-term capital in terms of strategy and tactics?

Deng Bin: From the perspective of the balance sheet, insurance funds, especially life insurance funds, have a liability duration of roughly 15 to 20 years, possessing typical characteristics of long-term funds.

Moreover, Ping An has a large amount of traditional whole life insurance assets, with the liability costs and cash flows of these assets being long-term and certain, which is a rather "perfect" state and condition for investments.

However, from an investment perspective, our task is to find "certain returns" in an "uncertain market environment" and then realize these "certain returns," which is quite challenging.

Therefore, in terms of allocation strategy, we will allocate as many long-term assets with certain cash flows as possible, including long-term interest rate bonds and assets with certain returns (at appropriate rates of return), in order to align our asset duration as closely as possible with our liability duration This goal also defines the three investment characteristics of our insurance funds as long-term funds and patient capital:

First, the stability of our investments is very strong. When we invest in something, we don't think about speculating on assets or stocks all day. Our goal is more about achieving allocation. In terms of our investment returns in the long run, more than 80% of the changes in investment returns are explained by asset allocation, with the rest being the contribution of market timing and security selection. At any time, discovering a good stock is just a drop in the bucket for Ping An's returns, our main source of investment returns is still asset allocation.

Second, our investments are countercyclical. Due to the strong stability of long-term assets and allocation, Ping An's portfolio can withstand cycles. We are not afraid of short-term fluctuations in some assets, and we can even allocate assets countercyclically. We will not rush to stop loss or engage in short-term chasing and selling when the market falls. Instead, we take advantage of these fluctuations to buy low and sell high countercyclically.

Third, we do not pursue extreme high returns. As investors, we may periodically find that the short-term returns of some assets are significantly higher than the return requirements of our policies. However, we will not significantly increase the allocation of these types of assets. Investing is a balance between risk and return, where higher returns often come with higher risks. We still focus on allocating long-term assets with strong certainty and predictability, capturing their long-term stable, predictable, and relatively reasonable returns.

Pain points and difficulties, unchanged in the past

Q: As insurance funds serve as long-term and patient capital, what are the "blockages" and "pain points" faced in actual investments? What adjustments and responses has Ping An made, and what breakthroughs are expected?

Deng Bin: We recognize the investment characteristics of insurance funds and also respect their basic laws.

In the current environment, how to achieve a long-term, stable return rate, allowing the balance sheet and income statement to generate greater stability, is largely one of the biggest pain points we face now.

In equity investments, for example, some high dividend stocks we invest in include not only bank stocks but also energy stocks, power stocks, shipping stocks, and communication stocks. We will try to maintain moderate diversification in the portfolio to spread the risks. Some large enterprises have a large market value but relatively low trading volume, making their prices easily deviate from the actual value of the enterprise. How to measure the value of these assets fairly and accurately, perhaps not just by market value, is something we hope to explore in the future.

In portfolio investments, how to make both our liabilities and assets stable, and reflect that stability in accounting, is also one of the challenges we face. Many of our client liabilities are lifelong, so when allocating assets, we also consider bonds with durations of twenty or thirty years from a "lifelong" perspective. Usually, these assets are not sold. However, if these assets experience significant price fluctuations, should we make significant adjustments to the portfolio to smooth out the fluctuations in our net asset returns? Or can we handle accounting in a more "stable" manner, better reflecting the strong stability characteristics and needs of our portfolio? This is also the breakthrough we are looking forward to

Expansion with a "Fixed Number" in Mind

Question: Ping An's investable assets have exceeded 50 trillion. It is well known that asset size is the "archenemy" of returns. How does Ping An overcome the potential impact of asset size expansion on investment returns?

Deng Bin: The trend of increasing the scale of insurance funds is established. When I returned to work in China in 2018, the investable assets of the Chinese insurance industry were 18 trillion, and now it has nearly reached 30 trillion. With more and more investable funds available, and the overall market's variety of returns declining, this drives us to make more proactive adjustments and strategic deployments.

In the past, the asset allocation strategy of insurance funds may have been relatively simple, covering the assumed return on the embedded value of policies by allocating some government bonds, non-standard bonds, along with some stocks and real estate.

However, facing a global unprecedented major change, the global economic structure is undergoing rapid transformation. The old economic structure is transitioning to a new economic structure driven by artificial intelligence AI, marking a turning point in Kondratieff cycles.

At this turning point, many things are undergoing drastic changes. In such a large environment, finding new growth points and making reasonable long-term allocations are the significant challenges we face.

In order to find new investment targets, meet the actual needs for reinvestment, Ping An is conducting in-depth and extensive research and analysis on new productive forces to find points of certain growth that match our investment pursuits.

After extensive contact with new productive force industries, our confidence in the Chinese economy has significantly increased. When we communicate with scientists, professional technicians, and people from all walks of life in these fields, you can feel their confidence, enthusiasm for industrial development, and optimistic outlook on market space. Sitting with them, you will feel a new world opening up. This is the direction we will focus on in future investments. We believe that China's future GDP is full of opportunities, and seizing this rising industry will be our opportunity.

Policies Set, Where Are the Opportunities?

Question: Recently, the country has held several important meetings and set the tone for the short-term and medium- to long-term policy directions. Have you observed any new investment opportunities from these meetings? Has Ping An already made any layouts in these areas?

Deng Bin: In terms of equity, the direction of new productive forces is more certain for new investment opportunities. We have conducted a lot of research and investment work in the field of new productive forces. Specifically, this includes clean energy, low-altitude economy, breakthroughs in hard technology, and more. We are actively participating in the allocation of stocks in energy storage, wind power, solar power, hydropower, and others.

Historical public information shows that Ping An has successfully allocated investments in stocks such as China Yangtze Power, a hydropower company, and has achieved considerable returns.

We expect that new productive forces should account for at least 15% or more of China's GDP in the future, leading to many more social changes, lifestyle changes, and investment opportunities At the same time, as China transitions from high-speed development to high-quality development, there will also be many important changes in the fixed income product market.

In the past, China's corporate bonds and credit bond market were not well developed, with few high-quality companies issuing long-term credit bonds. However, this is common in overseas fixed income markets. We can see century-old companies, large enterprises easily issuing 30-year corporate bonds, or even 50-year credit bonds.

We believe that from now to the next ten years, we will see Chinese excellent companies making qualitative leaps in corporate governance and operational capabilities. This group of companies with long-term sustainability will bring significant changes to the Chinese credit bond market, and will also widen the credit spreads of different bonds, all of which are welcomed by long-term funds such as insurance companies.

At the same time, as more Chinese companies continue to expand their "going global" business scale, global investment opportunities will also emerge in the capital markets. In the future, we can imagine that with the development of the Chinese economy, the development of listed company governance, and the progress of RMB internationalization, Chinese companies' strategic layout overseas will definitely expand. This will also provide us with more investment options.

Question: Ping An Insurance and its subsidiaries have bought Hong Kong bank stocks multiple times this year. What is the consideration behind this? What is Ping An's main strategy in equity investment going forward?

Deng Bin: Equity investment is a very critical part of strategic asset allocation. Because the ultimate goal of an insurance company's investment is to meet the needs of liabilities. This cannot be achieved solely through bond investments. Therefore, there must be growth assets.

Ping An's asset allocation can be seen as a balanced "dumbbell" configuration.

The first "dumbbell" is the entire portfolio allocation, with one end being long-term interest rate bonds and the other end being risk assets.

Under risk assets, there is a small "dumbbell". One end is growth stocks, such as Ping An increasing research in configuring new productive forces; the other end is high dividend value stocks.

As for why invest in Hong Kong stocks, it is because the relative prices and dividend yields of Hong Kong stocks are more attractive, but our stock investments in A-shares and H-shares are balanced, not biased.

Question: The bond market has risen a lot this year, with much discussion. What are Ping An's future investment principles in the bond market?

Deng Bin: In the previous period, when bond rates were relatively high, Ping An allocated long-term bonds on a large scale and beyond the budget. Now, as rates continue to decline, it has validated the correctness of the judgment at that time.

At this stage, more patient investments are needed. We tend to follow our long-term allocation plan step by step. But there is no need to allocate excessively or beyond the budget.

In terms of allocation strategy, there are two mistakes: one is in a high stock, rising interest rate environment, allocating a high proportion to stocks and neglecting bond allocation, and the other is locking in long-term assets on a large scale when rates are low. Both are mistakes to be avoided.

Looking ahead, is there still a chance for rates to decline? I think there is a probability, how much it will decline is subjective, but the direction is quite clear At the same time, we firmly believe that China will not move towards zero interest rates, nor will it repeat Japan's 30-year low interest rate path. The depth and complexity of the Chinese economy are greater, and the central government's policy execution is stronger. With various reasons combined, and learning from Japan's experience, we believe that we can find our own unique development path