Why the time is right for alternative investments

Enrico Conti, from BancAssurance Popolari, explores the main drivers towards alternative investments.

Enrico Conti (1)
Enrico Conti, finance operations expert at BancAssurance Popolari.

Insurance portfolios have recorded growing investments in alternative funds over the past few years.

This process is driven by the persistent low interest rate environment for the common asset classes, and by a general regulatory framework (The Investment Plan for Europe, so-called Junker Plan - Regulation (EU) 2015/760) to contribute in the European long-term investment funds on SMEs and into infrastructure projects.

Within alternative funds there are different typologies of investment to be considered. These include:

  • Corporate loans (private credit; direct financing)
  • Private Debt (infrastructure debt and solution; illiquid corporate bonds)
  • Private Equity (core strategies; co-investments; real estate equity)
  • Hedge Funds (event-driven; global macro; multi strategy)

The market opportunities for alternative funds, come also as the result of decreasing bank activity to support the cumulative institutional needs to finance overall business projects.

That missing space has been recovered by the Asset Management Company, to meet the market needs through the placement of these specific instruments.

In this way, the insurance sector trend for this asset class is growing up, focused on catching a good yield for risk with reduced volatility, since these investments are usually decorrelated to the financial market.

"The insurance sector trend for this asset
class is growing up."

The target size of alternative funds for an insurance portfolio is generally residual, in balance with the low level of liquidity assessment but sustainable in the long horizon, in consistency with the liability’s dynamics. 

The option to invest in alternative funds, allows a diversification of the portfolio from the common asset classes, but more and more the concept for this typology of investment is linked to the support to the real economy and the sustainability for ESG product.

However, the penetration rate for the alternative funds in the insurance portfolio still shows a large margin. Often the process to deliberate on an investment in this kind of asset requires several steps, including specific analysis on screening, valuation, risk control and knowledge of the underlying assets.

The asset managers need to specialise in this specific investment solution, in part to select the alternative fund with all the appropriate financial drivers, and on the other side weighing the fund with the rest of portfolio.

"The option to invest in alternative funds, allows a diversification of
 the portfolio from the common asset classes."

Often the few performance indicators, or abridged historical data, and the limited access to information, or the restricted evaluation of the comparable approaches among the funds due the specific strategy and business approach that any alternative fund submit, leave the asset manager still dependent on the fund manager.

Anyway, to be successful on the alternative fund asset class, it’s important to build the investment in a constant way, with attention to the geographical diversification and by industry sector: this strategy allows you to obtain more stable results.

The road to cross for the insurance sector is just at the beginning, the field shows good perspective both by the solution providers and by the final investors. The framework is supported by the EIOPA regulator, with a solvency capital charge facilitated for detailed investment, for example by infrastructure entity or for long-term equity investment. 

Even the forecast risk appetite, despite the current year signed by COVID-19, shows for the insurance sector a maintenance/increase of the risk profile, guaranteed by a better portfolio flexibility to be resilient in various market conditions: that allows to the asset manager to research in the alternative funds a selective opportunity for diversified illiquid allocation.