Even well-resourced institutional investors with relative freedom to allocate internationally are finding life difficult these days. Sophia Cheng, chief investment officer of Cathay Financial, the parent of Taiwan’s Cathay Life, has outlined how her firm has approached the twin challenges of low interest rates and high market volatility.

The country’s biggest life insurer, with $134 billion in assets under management, has steadily built a 220-strong investment team to help it find mispricing opportunities and generate alpha, Cheng told the FT Asia Insurance Summit last Thursday.

“Whenever we have different views from the sell side and we get it right, that is our alpha,” she said.

But achieving that is no easy task in the current market environment. “In terms of investments, it is very hard to feel relaxed,” noted Cheng. Investors must take greater credit, duration and liquidity risk to achieve the desired returns, she added.

Taiwanese life insurers have faced a major challenge in recent years in that they had sold products with average guarantees of 7% to 8% returns. But yields on 10-year government bonds are around the 1% mark now, making it very tough to bridge the gap between assets and liabilities.

Cathay Life, which won AsianInvestor's institutional excellence award in the insurance category last year, has expanded its global investment research capability, sought more consistent and stable returns and employed more hedging strategies as it builds its overseas exposure, said Cheng. 

It now has 51% of its portfolio in foreign assets – 45% in bonds and 5.8% in equities. Of its foreign fixed income exposure, 45% was allocated to North America, 25% to Asia Pacific, 18% to Europe and 12% to other markets, as of June. That is up from 43.9% overseas as of the end of 2014, indicating a significant rise in just six months.

The insurer has also invested in mortgage securitisation loans and participated in infrastructure projects, which Cheng said could eventually generate better yields than those generally available domestically.

With regard to China, she said the insurer trimmed its positions in mainland equities in the second half following the mid-year stock-market crash, and is selectively looking for buying opportunities.

Another challenge is managing expectations of customers when it comes to product performance. Cheng noted that product sales teams must be trained so that they can educate agents and clients on what level of returns will be sustainable, especially in an environment of falling rates.