The amount of uncertainty in the market at the moment has meant there are a lot of potential return profiles and regime changes occurring – so how can responsible portfolio managers and investment professionals monitor this and make the necessary changes?
This was the question put to Nizida Arriaga, Head of Fixed Income Investments, The Auto Club Group and Robert Cataldo, [former] Chief Investment and Strategy Officer, United Fire Group by Greg Cobb, Director of Insurance Solutions, Sage Advisory Services at the Insurance Investor Live | Midwest event in Chicago earlier this year, which is now part of the Insurance Asset Management Mid-Year Insights report.
Cobb said that over the last 12-18 months many in the market have adjustments in their asset allocations - so what does this mean? Cobb asked the panellists whether these changes have been more incremental in nature or has there been a more significant tactical move?
“Even when we talk about reviewing our strategic asset allocation,
the changes are not huge."
“Strategic asset allocations (SAA) take a long-term view,” said Arriaga. “Adjustments are incremental and measured. Tactical moves occur mostly on the margin by our external managers.”
She reiterated also that client constraints and needs drive SAA not the other way around and that “they don’t change much”. Other investment professionals have also mentioned intense market interest around SAAs, but that the market should use the idea more as long-term planning than short-term cash cows.
Christopher Wright, Group Treasurer, Legal & General, recently told Insurance Investor that “many schemes are reaching maturity earlier than expected, with SAAs that are not necessarily fully ready for buyout; this presents opportunities for insurers to step in and help with that transition”.
Arriaga advised caution and restraint in this area and a slow steady approach for maximum efficiency. “Even when we talk about reviewing our strategic asset allocation, the changes are not huge; we don’t “sell the farm” because our endpoint continues to be the same,” she said.
Cataldo largely agreed, emphasising the slow and steady mantra rather than jumping from idea to idea depending on the momentary fluctuations of the market.
“Our mandates are not to chase the next shiny toy or to jump into RobinHood or Bitcoin, etc., so the goal is to preserve surplus and grow the balance sheet,” he said.
This is a widely exalted idea in the industry and one that many investment professionals repeat. However, There is still pressure to chase the next big thing.
This ethos was called “Tortoise investing” by Eastspring Investments. They said, “A low volatility portfolio helps to balance performance over time by losing less in negative market periods while still participating in positive market periods, albeit to a lesser extent than the broad market.”
Cataldo said his previous experience was that to talk about the liability side of the balance sheet and what discuss with colleagues about what was happening on that side of the business - “as it relates to climate change, social and economic inflation, reserve distortions because of Covid, etc., there is a lot of volatility in the business itself”.
“As long-term investors, and as we look forward, the idea is to make sure
that we are protecting downside."
He said that his previous strategies to combat issues like this were to reduce or exit public equity portfolios, which is what he did in Q4 2023. “At the time we were having a bit of an insight into the high yield market and gradually we stepped into the below investment grade, BB space and looked at companies that were cycle worthy or cycle-proof based on the management teams and the track record of those teams,” he said and added that these tactics and relative value are more of a day-to-day element.
“As long-term investors, and as we look forward, the idea is to make sure that we are protecting downside, and we give up a little on the upswing,” he said. “The idea of reducing volatility was a key point for us and continues to be.”
The discussion built on this theme, with Cobb asking about the heightened levels of volatility seen in the markets over the last few years, and what this has on an active management. Has there been tightening or new strategies?
“Duration is a market-to-market issue, but we are getting pretty healthy yields given what we experienced post financial crisis."
“Far and away, it is balance sheet constraints,” said Cataldo. “In the P&C space if you have a good year, you make a nickel for every dollar you bring in and the industry itself has been running at 100 or a little over 100 combined ratios for the last several years anyway.”
This surplus portfolio, he said, is precious because as an insurance company, you have to be careful when trading duration credit and liquidity risk. “Duration is a market-to-market issue, but we are getting pretty healthy yields given what we experienced post financial crisis,” he said.
He explained that this is particularly resonant when talking to the board or management team to discuss what areas the portfolio is moving into and why, what are the expected returns, as well as the timeframe. “You need to measure this up with your corporate development team and luckily, I wore both hats so was able to do this with ease,” he said. “You want to check whether the capital is getting its best risk adjusted return, organic growth or inorganic growth. It is in the AA tranche of a CLO. These were the conversations we were having.”
“The P&C insurance business is competitive and is affected by climate change."
Arriaga agreed and talked about managing assets with a total return mandate as the “hardest way” to manage assets. “Under a total return mandate, you can sell or buy assets as you seek to maximise returns,” she said. “In a way, in the continuum of ways to manage money, this is probably the simplest and purest way. At times, managing money with many constraints may be harder.”
She said it was important to consider a clients’ objectives and operational environment when making these kinds of decisions. “The P&C insurance business is competitive and is affected by climate change. Insurance companies also have constraints driven by regulation and liquidity,” she said.
“The good thing about insurance is that you have a litany of reasons to discourage it as accountants won’t let you do X, you don’t have the capital for it and total return is a square or a circle and it’s a fight that never ends,” she said. “We, at least, have the reasons to push back the sell-side broker.”
