Yield on LIC's investment portfolio slipped to 8-year low of 7.59% in FY19

Poor industrial growth and the downward pressure on bond yields and interest rates have begun to take a toll on the investment portfolio of Life Insurance Corporation of India, probably the country's single-largest investor in fixed income securities and the equity market.
 
The yield on LIC’s investment portfolio declined to an eight-year low of 7.59 per cent during 2018-19, down 12 basis points (bps) on a year-on-year (y-o-y) basis, according to its annual report for FY19. As a result, the spread of LIC’s yield over the 10-year government of India bonds shrank to a five-year low of 24 bps in FY19, as against 31 bps in the previous year.
 
One basis point is one-hundredth of a per cent.
 
The data suggests that the decline in yield is largely due to slower growth in net income from investment compared to the growth in the insurer’s investment portfolio. It had a net investment income of Rs 2.2 trillion in FY19 on an investment portfolio of Rs 29.3 trillion. In the last five years, LIC’s investment portfolio has grown at a compound annual growth rate (CAGR) of 12.8 per cent from Rs 16 trillion in FY14 to Rs 29.3 trillion in the last financial year. In the same period, the corporation’s income from investment grew at a CAGR of 9.3 per cent from Rs 1.43 trillion in FY14 to Rs 2.22 trillion in FY19.
 
The insurer mostly invests in fixed-income instruments such as long-term debt issued by the government of India, state governments, and public sector companies. Analysts say the yield on its fixed-income portfolio is highly correlated to the movement in the yield on 10-year government bonds, and largely explains the recent decline in returns for LIC’s portfolio. According to the LIC annual report, equity (at market value) got a significantly smaller share in the portfolio.
 
Deven Choksey, managing director of KRChoksey Investment Managers, said an increase in allocation towards equity could help.
 
However, large institutions like LIC face issues that don’t affect smaller investors. Many companies in the listed space may not have the capital base and free float to absorb a meaningful investment from LIC.
 
“It is a challenge for large investors like LIC to find liquid stocks for large investments in equity. Market depth is very limited if one goes beyond the top 100 companies,” he said.
 
This restricts LIC’s choice to a select group of highly capitalised and liquid shares in sectors such as banking, consumer goods, commodity and energy companies, power, telecom, automotive, and capital goods. Many leading companies in these sectors are struggling due to the industrial slowdown over the last five years, adversely affecting the yield on LIC’s investments.
 
An email sent to LIC did not yield a response.
 
Nipun Mehta, founder and chief executive officer of BlueOcean Capital Advisors, said LIC could look at gradually boosting the yield by diversifying its portfolio beyond the traditional investments it had always made. This can be done in multiple ways, according to him.
 

“Firstly, invest more in equities which can gradually increase the yield. The second way is to look at higher risk investments like a REIT (Real Estate Investment Trust) or an Infrastructure Investment Trust (InvIT),” he said.
 
A REIT holds a real estate asset like a residential property. The return is largely in the form of rentals and any capital gain from appreciation in property value. An InvIT looks for a similar return from an infrastructure asset like a toll road. While LIC does hold real estate and infrastructure assets, India only has a nascent market for investments through structured products like REITs and InvITs which are widely used by global pension funds and other institutions.  A lot of global institutions also allocate capital to riskier bets like hedge funds to help increase yield, Mehta pointed out.
 
There has been criticism over the years, and across governments, that the LIC has been used to bail out government-owned institutions or to help meet divestment targets. Experts have previously said that this can be a drag on returns.