Abstract
The study empirically examines the impact of the business cycle approach to asset allocation with respect to an optimal asset allocation model for South African life insurance companies during the period 2008 to 2023. A Regime-switching-Black-Litterman (RSBL) model incorporating asset rotation, sector allocation strategies, and sentiment analysis based on the Federal Reserve’s tweets is employed due to its enhanced robustness and performance in overcoming the hurdles prevalent in portfolio optimization problems. The results reveal that the RSBL is a proficient asset allocation model and addresses the gaps in the literature regarding emerging markets and the integration of sentiment analysis. Moreover, the results provide strong evidence in support of the hypothesis that long-term asset investments of South African life insurers may not require continuous adjustment. The results further indicate that the optimal asset allocation strategy for South African life insurance companies for each phase of the business cycle include investing more in the financials (STXFIN), healthcare (IXJ), and the industrials (STXIND) sectors, during a recovery phase. Furthermore, during an expansionary phase, life insurance companies should shift their portfolio holdings more towards the industrials (STXIND) and healthcare (IXJ) sectors, as well as gold (GLD). Whereas, during a contraction, South African life insurance companies should invest more in the healthcare (IXJ) sector, U.S. treasury inflation-protected securities (TIP), and gold (GLD), due to the hedging benefits associated with these assets, as well as the strong liquidity of U.S. treasury inflation-protected securities. Lastly, during a recession, life insurance companies should increase their investment in the resources sector (STXRES), U.S. treasury inflation-protected securities (TIP), and the healthcare (IXJ) sector, respectively. Thus, the study provides valuable insights into portfolio management and asset allocation for South African life insurance companies.
Keywords: Asset allocation, South African life insurance, Business cycle approach, Regime-Switching Black-Litterman model.