Caution is key

Hong Kong’s Chow Tai Fook Life Insurance (CTF Life) has taken a cautious approach in constructing its alternative investment portfolio, and is selective about third-party managers hired for each asset class.

CTF Life is a unit of logistics and construction conglomerate CTF Services, controlled by Hong Kong billionaire Henry Cheng. The insurance firm had around HK$81.9 billion (US$10.5 billion) of investable assets as of end-2024.

“We see alternative investments as an important component of our overall investment portfolio for both diversification and return enhancement,” Richard Chan, CTF Life’s chief investment and asset-liability management officer, says in an interview with Asia Asset Management.

Around 10% of assets are allocated to non-mainstream assets in terms of the amount committed, and around 5% in terms of insurance premiums paid by policyholders.

“We are very cautious of these investments and avoid making an allocation decision just because of a better Sharpe ratio or attractive return according to the Hong Kong risk-based capital,” Chan says.

CTF Life has built its alternative investments gradually over many vintage years, and they are included in the investment portfolios of more than 30 insurance products.

Allocations are different for asset-liability management reasons. Some older and higher guarantee products have negligible allocations to alternatives, but those with greater emphasis on long-term capital growth and less on liquidity and guaranteed returns may have over 20%.

According to Chan, institutional investors tend to underappreciate some risks in alternatives, pointing to liquidity risk as an example. “Most investors only think about the liquidity required to support their contingent liabilities and cash flows,” he says. “But the investors miss the fact that they also need additional liquidity to adjust and rebalance their portfolios from time to time.”

Private debt

Private debt has become one of the most popular alternative asset classes among global insurers. According to a Goldman Sach Asset Management survey in March, 58% of global insurers plan to dial up exposure to private debt over the next year for the attractive risk-adjusted returns.

The downside of the popularity is that the market has become overcrowded. Chan notes that many of the asset managers have little experience in private debt investments.

“This will result in style drift of some existing managers to cope with the deployment pressure,” he says. “As such, CTF Life only selects managers who are experienced and with discipline to stick to their underwriting standards.”

The firm has developed a globally diversified investment portfolio across major markets like the US and Greater China, and invested into a wide spectrum of asset classes.

“Such diversification across different asset classes helps improve the resilience of investment return against different kinds of market scenarios. Moreover, the agility to switch into different asset classes and markets also allows us to capture opportunities,” Chan says, adding that CTF Life has different strategies for each to enhance returns.

For investment grade bonds, the insurer monitors credit conditions and de-risks before ratings are downgraded and spreads widen. It also regularly rotates across global credit markets to take advantage of different demand and supply dynamics.

As for equities, Chan says CTF Life has built an in-house macro and equity research team, allowing the company to directly manage a portion of its equity portfolio through a high-conviction, and fundamental and value-driven styles.