Image by Arek Soch.
Some of the key fundamentals of the market remained worryingly unstable, says market veteran, Randy Brown, Chief Investment Officer of North American Insurer Sun Life in a wide-ranging interview.
In a recent Clear Path Analysis report, Insurance Asset Management - North America 2022, several market experts from insurance groups including AllianceBernstein, Mercer, and Liberty Mutual, explore issues around good asset management in the post-pandemic world.
“Together, we have an ageing demographic, large amounts
of negative debt, government deficits that are overflowing.”
Brown said that when elements such as the wider economic picture emanating from the post-pandemic economic factors were put together, with other factors it created a less than rosy picture.
“Together, we have an ageing demographic, large amounts of negative debt, government deficits that are overflowing, negative real rates that are persistent, high inflation, tight spreads, and market technicals skewed towards risk,” he said “The risk transfer mechanism from seller to buyer historically went through Wall Street, but balance sheets are down 90% and capital markets are triple. We went from a lot of exits to just one.”
The counter force to this are ETFs, he said, which are the first form of risk transfer but are only as good as their buyers and sellers can clear the markets. “Liquidity in the public markets is a façade, which is why we have been in the private markets for a very long time. This is one of the risk premia that is mispriced still.”
“We continue to grow the private debt book and
have sixty people who originate for the balance sheet."
The collapse of public markets liquidity has been highlighted by others in the market as a cause for concern. In February, the FT said the Ukraine conflict risked exacerbating the shrinking of the market.
As part of a strategy to tackle this change in liquidity and risk premia, Brown said Sun Life has moved up in credit quality within their public corporate bonds. “We have to be duration matched and don’t have the luxury of owning cash. We continue to grow the private debt book and have sixty people who originate for the balance sheet. We still see good value, but the market is getting crowded.”
Brown added that their selectivity rate continues to become lower as they see investors chasing terms that they would never accept, which has been an issue across the financial markets post-pandemic. “We have excess capital and have moved to increase into non-fixed income assets in the form of commercial real estate equity, infrastructure equity and alternative credit, where we are seeing great values relative to everything else.”
“The market is priced for perfection so any little hiccup could see a repricing. Because buying off the shelf doesn’t really pay, we are doing a lot more in development and have built up our land bank, said Brown.
“Our allocation today is directed more in infrastructure equity,
real estate, private debt (commercial loans and traditional private debt).”
US Bank said in June of this year, that it sees the decline in capital market liquidity as partly the reason for this repricing structure.
“We are using [model] this to build and get the development premia in areas like logistics,” he explained and highlighted the ways they were avoiding any volatility. “Our allocation today is directed more in infrastructure equity, real estate, private debt (commercial loans and traditional private debt), less fixed income and down in credit quality and public assets,” he added.
