The guest on this edition of Top Investors is Mark Konyn, Chief Investment Officer of AIA Group. AIA Group is a leading global life insurer founded in Shanghai in 1919, with a history spanning more than a century. Mark has more than 30 years of industry experience and has been with AIA for over a decade, having previously held senior Asia-Pacific roles at several asset management institutions. In the interview, Mark said the selloff in developed-market bond markets reflects investors' response to the multiple shocks currently facing markets, meaning real interest rates could remain elevated for the next decade and investors need to recalibrate risk and return. He noted in particular that China is undergoing structural changes unlike those of the past, with a focus on long-term quality and genuine opportunities; for the market, short-term volatility stems from results not yet being delivered, while the medium- and long-term direction is clear and certain.

Where to start

Yicai: Mark, let's start at the macro level. As investors, we are in an extremely complex environment: ongoing geopolitical conflicts, a rapidly changing technology landscape, and growing concerns about debt risk in developed markets. Among these risks, which worries you the most?

Mark Konyn: I think particularly for a company like AIA Group Ltd (HKG: 01299), which invests globally, we collect premiums from policyholders and then plan how to invest to match our long-term obligations to them. Investing always comes with risk and volatility. The question is: can the risk you take earn a reasonable return? That is the key. Policyholders have trusted us for a long time, and we have long-term responsibilities to them. What we often call patient capital means: we need to match cash flows across multiple cycles. So we typically look through cycles to ensure the risks we take are rewarded with value. In the face of short-term volatility, we respond strategically and flexibly so we can adjust in time as the environment changes. So although the market today carries considerable risk, in our view there are opportunities everywhere.

Yicai: You are a long-term investor. Take technology, for example. The tech industry landscape iterates almost every week. How do you balance the two?

Mark Konyn: One core challenge brought by innovation is that innovation happens at lightning speed, while the pace at which it translates into investment returns is often not synchronized. When building portfolios, we place great emphasis on staying flexible and adaptable. That means we can seize opportunities and tap the potential gains brought by technology, but we generally do not hold such positions for the long term. We want contractually guaranteed cash flows, and we also require a certain degree of certainty in that investment and the underlying assets.

Yicai: Recently, global media have focused on the selloff in developed-market bonds. What is your view?

Mark Konyn: This is key. Clearly, as an insurance company, more than 70% of our portfolio is allocated to fixed-income assets such as bonds, because these assets can provide contractually agreed cash flows to support our liability payments. I will answer your question directly. I think the current bond market reflects, on the one hand, a cyclical adjustment in bond prices, and on the other hand, a structural adjustment that is taking place. The reason is that in international markets outside China, the dynamics of real interest rates are shifting. This brings us to the so-called term structure. That means: the longer the investment horizon, the higher the return you will demand from the company or sovereign financing entity you invest in. For investors, the longer the contract term, the higher the return required. Broadly speaking, since the Global Financial Crisis (GFC), we have rarely seen such a situation. So there are both cyclical and structural factors at play. Our view is that this state will persist for a longer period. When doing scenario analysis, we do not try to predict the future; instead, we strive to make the portfolio resilient and able to operate steadily across various market scenarios. One scenario, which is also our base case, meaning the one we consider most likely, is what we call real interest rates, that is, inflation-adjusted rates, potentially remaining elevated for as long as a decade.

Yicai: It could last as long as a decade. Behind this, does it mean there is a problem with government credit?

Mark Konyn: I think this is a shift, especially in developed economies, a turn in interest rate policy and economic policy. There is no problem with that in itself. In fact, you are asking this question from the perspective after 2008. That period felt very long for all of us, roughly 18 years. In terms of interest rate cycles, that is not a short period; but if you look back at the period before 2008, it was not long. What we are seeing now is actually a return to the state we used to take for granted.

Yicai: Mark, over the past 15 years, investment markets have largely been US-centric and highly rewarding. Looking ahead, are we entering a multipolar investment landscape?

Mark Konyn: I think we are already in a multipolar investment world.

Yicai: But 70% of the world's money is still in the United States.

Mark Konyn: You are right. If you look at public equity markets, 70% of global market capitalization is concentrated in the United States. But I do not think opportunities are limited to the United States. As a long-term investor, especially since we operate in 18 markets in Asia, most of our responsibilities relate to local individual policyholders. Our approach is to pool local savings and then channel those funds back into the local economy; a great deal of our investment work is done at the local level. I would question the assumption that everything is about the United States. Take China, for example. It is currently undergoing structural changes completely different from the past. The market places greater emphasis on long-term high-quality development, and there are indeed real opportunities here.

Yicai: Mark, you told me you come to the mainland at least four times a year. China is a crucial market for AIA. From an investment environment perspective, compared with two or three years ago, how do you view China's current investment environment?

Mark Konyn: I think the direction of development is quite clear, and that is precisely the real advantage of the five-year planning cycle. Investors can feel relatively assured and can see the direction of the economy's efforts, policy priorities, where the needed funds will be directed, and the results these measures may bring. We all know that in China, the ability to coordinate and mobilize various capital resources around specific areas is unique globally. At present, we see some new arrangements, such as the construction of the "six networks," covering logistics, power supply, and areas related to technology, communications, and internet innovation. These sectors require a high degree of coordination and linked progress to deliver results. I think the medium- and long-term development direction here is clear. The short-term volatility we are seeing now is because we have not yet reached the point where the related benefits are evident and the evidence of results is obvious.

Yicai: Mark, I have spoken with many international investors, and there is a consensus: at the macro level, China indeed faces some challenges; but at the micro level, there are abundant opportunities here. How do you view and balance these two realities at the same time?

Mark Konyn: I do not think these are two different realities; they are part of the same reality. Looking globally, most economies currently face macro-level challenges, and these challenges are closely related to the economy's stage of development, demographic trends, and underlying economic structure. In the Chinese market, the key lies in local insight. Earlier this year, AIA established a new asset management company. The original purpose of setting up this institution was to get closer to and deeply cultivate the market. We hope to combine global and regional investment experience with deep local insight, so that bottom-up and top-down research can mutually reinforce each other. One thing AIA Group does very well in China is to bring global standards into China's market framework. We examine various investment opportunities in the Chinese market with a global perspective and a regional lens.

Yicai: How is this asset management company progressing?

Mark Konyn: We have had a very smooth start. Regulators in Shanghai provided strong support in the license approval process. We officially began operations in February this year, performance has been good, and team morale is high. So if I were to give a score out of 10, against the goals we initially set, for the progress over nearly a year, or the first year, I would give a very high score, close to full marks.

Yicai: You just mentioned China's 15th Five-Year Plan, and the five-year plan for the financial industry was also released recently. This plan proposes promoting China's development into a financial powerhouse over the next five years. Why is building a financial powerhouse so important?

Mark Konyn: I think this largely comes down to diversification. China is already deeply integrated into the global economy. As is well known, China is an important trading partner for many economies around the world. Behind cross-border trade, there must be a supporting financial system and the ability to manage risk well. At the same time, China has a large amount of deferred consumption. What do I mean by that? It is savings. What economists call deferred consumption is essentially savings. Savings themselves are a good thing, provided they can be converted into effective productive input, right? That requires investment. The core of investment is not whether you are willing to take risk, but how much return you can obtain after taking risk. The best way to improve the risk-return ratio is diversified allocation. We need two-way capital flows: on the one hand, we welcome inbound foreign capital into China to capture investment opportunities here, and international investors have a strong willingness to participate; on the other hand, the other layer of two-way flows is that we also need to be able to invest in international markets. If I were to summarize, what is the core goal? The goal is to convert savings and capital into productive investment, not just to expand scale. What we want is for savings and capital to truly generate investment results. I think this is exactly where China can accomplish a great deal, and the starting point is not yet high. China has already proven itself to be a major trading power; next, we look forward to seeing it grow into a financial powerhouse.

Yicai: One final question: there are too many trend traders in the market. What is your main contrarian view right now?

Mark Konyn: We are willing to invest contrarian, especially when markets are turbulent and the landscape is being reshaped. We are always looking for value. I do not have a single contrarian view at the moment. In my view, the biggest risk of trend investing may be that investors easily overlook valuation. The yardstick of valuation must not be abandoned. We need to focus on earnings quality and the quality of the underlying factors driving economic activity. But many investors habitually look in the rearview mirror and refer to past experience when making decisions. The risk of doing so is that it becomes difficult to hold assets through the cycle. And when the market is undergoing structural change, those in the middle of it often cannot see that it is a cycle. I think we are in such a phase right now. So adhering to valuation discipline is the path to uncovering investment opportunities, and this should not be underestimated. This is an investment opportunity that lasts for years, and possibly even decades.