Hong Kong’s FWD Group is trying to be more nimble in its approach to investments, something its chief investment officer sees as key in a more yield-constrained world.

The insurance industry is slow to take advantage of new, non-mainstream investment opportunities, said Paul Carrett, who joined as group CIO last October from UK insurance giant Prudential.

“Because of the way they are set up, insurance companies don’t immediately have liquidity issues where there is a crisis, so they can ride out volatility,” he noted. “On the downside, this has meant that even when good, sensible returns are available by doing things differently, they have generally been too conservative and slow to act.”

Carrett, and other insurance executives, made a similar point at AsianInvestor's Insurance Investment Forum in late February this year, as reported.

Many insurers would probably argue this deliberate approach has helped keep them out of trouble. But it has also left them ill-prepared for an environment in which the fixed-income assets they rely on so heavily have stopped offering the returns needed to pay long-term policies.

“We feel we can be different,” Carrett asserted. “We think we can make extra money in these situations.”

Paul Carrett, FWD

For instance, he feels insurance companies have traditionally failed to take advantage of derivatives.

“Particularly where it comes to longer-dated bond hedging and interest-rate derivatives, I think the industry can do better,” he said. “And if you have exposure to equities, you should keep open the options of both physical and derivative formats. At various times it makes sense to get the exposure synthetically instead of physically.”

Carrett’s desire to ensure FWD is an adroit investor is set to come in handy during a period in which markets remain highly priced, and vulnerable to pronounced shocks.

“The ability to trade around volatility is important,” he said. “The thing we and our rivals have to be careful of are the really crowded trades that exist out there.”

Such as? “Well, I like private equity but if you have a lot of money chasing the same assets, then you should expect lower returns. We’ve seen many press releases about the pursuit of the illiquidity premium, but it’s been bid down to zero in many instances.”

As with most difficult issues, there is no simple solution to this: “We have to source and analyse opportunities.”

As one example Carrett points to European corporate loans. “Banks are constrained [in Europe] and insurance companies are less so, so can step in and offer some support,” he noted.

FWD had not exploited such investments at the time of this interview last month, but Carrett said it was looking for similar asset classes where institutional barriers are holding back investors.

“At a time of volatility and changing circumstances, there will be structural changes, and you need to be able to source, analyse and execute transactions when they arise,” he said. “But these areas can arise and disappear quickly. I want us to be a house that can take advantage of them when they arise.”

FWD, owned by Hong Kong conglomerate Pacific Century Group, had $15.4 billion in assets under management as of October 2016. It has businesses in Hong Kong, Macau, Thailand, Indonesia, the Philippines, Singapore and Vietnam.

The full version of this article appears in the June/July issue of AsianInvestor magazine.