How insurance investors can maximise returns in a low interest rate market was discussed by industry experts in a recent panel discussion, where the participants pressed that investors needed to be innovative in order to find good yields in the fixed income space.
In a Clear Path Analysis webinar, in association with Vesttoo, several panellists including Huayin Lin, Senior Investment Portfolio Manager, Aviva Investors, Nick Dixon, Former Investment Director, Aegon and Tom Sumpster, Head of Private Markets, Phoenix Group were joined by Robert Hauff, Portfolio Manager at Vesttoo to discuss some of the macro themes around diversifying with non-catastrophe insurance linked assets
"Where you have short term liabilities, in the next two to five years, it is difficult
to diversify from short term fixed interest instruments"
The panellists were asked whether in the current low interest rate environment that life and P&C insurance risk investments can satisfactorily diversify their portfolios.
“Where you have short term liabilities, in the next two to five years, it is difficult to diversify from short term fixed interest instruments and money market if you are to deliver predictable returns that can cover liabilities. Over short periods, other asset classes are too volatile,” said Nick Dixon, formerly of Aegon. “For the short term, there is no way to diversify beyond fixed income and money markets and get predictable returns. In the longer term, there is scope for the industry to raise its investment risk with portfolios that are unmatched to liabilities with a higher volatility and range of potential outcomes,” he said.
He added that this may be counterintuitive due to involvement of prolonged periods and having to take on more risk in your portfolio e.g., with equities, infrastructure, private housing, and other property assets.
“However, you can have long term investments with reasonably predictable annual returns that can, over long periods, match your liabilities even if they are not guaranteed returns,” he added.
"In the private markets, there are areas in which investments continue
to be attractive”
Tom Sumpster, of Phoenix Group, said that as the market was in a rising interest rate environment and was feeling the effects of inflationary pressures it would be challenging for the fixed income market to address this over the long term. “In the private markets, there are areas in which investments continue to be attractive,” he said. “In my portfolio, we match against Defined Benefit schemes that have a fixed liability attached to them over a period, and this is to look at index-linked investments that we can make.”
“This may be in the utility sector or government-backed revenue streams - social housing or university accommodation - and into real assets environment that helps future proof that inflation risk that we have,” he explained.
"Whilst everyone may be searching for yield, protecting pension liabilities
for the long term is crucial"
Sumpster added that raising rates and inflationary pressures often lead to winners and losers around recessionary pressures that come up. “Therefore, downside risk plays into our investment thesis and how we protect that in these markets,” he said.
He noted that there is also the longer-term macro-economic situation around energy transition and climate change to be considered and explained that with fossil fuels, the group take a shorter-term view on the investment horizon. “Whilst everyone may be searching for yield, protecting pension liabilities for the long term is crucial,” he added.
