Scouring the world for investment opportunities
Captives and other re/insurance companies should take a global view when looking for investment opportunities, according to an investments panel at the Bermuda Captive Conference. Bermuda:Re+ILS reports.
Bryan Gartenberg, Texas Capital Bank
The world is a big place, with far more opportunities to be found for those willing to look off the beaten track, according to panellists speaking at the Bermuda Captive Conference in September.
In a session titled “The Global Impact of COVID-19: Will Investments be Impacted for Captives?”, panellists advised investors to look beyond the shores of Europe and the US if they want to find profitable investment opportunities.
Andries Hoekema, global head of insurance sector at HSBC Global Asset Management, stressed significant differences between countries in terms of their responses to COVID-19, and said this has created opportunities for investors with a global remit that are willing to look outside their traditional markets.
“After the pandemic, investors will have to think differently about diversification, in terms of both geography and sector.” Andries Hoekema, HSBC Global Asset Management
“In mid-March we were seeing lockdowns in Europe at a time when colleagues in Hong Kong were already going back to work,” said Hoekema.
“Asia has coped more quickly with COVID-19 and that creates opportunities, particularly for European and Asian insurance companies willing to take advantage.”
Hoekema said that after the pandemic, investors will have to think differently about diversification, in terms of both geography and sector. Investors should not slip back into their old assumptions, he said, even after a vaccine is developed that allows businesses to start returning to normal.
“Working from home practices, for example, have changed urban economies in ways that will not necessarily change back,” he added.
Interest and equity
Bryan Gartenberg, director of sales escrow and specialised services at Texas Capital Bank, highlighted the different priorities of the bank’s captive and reinsurance clients. While captives are most concerned about their cost of capital and liquidity, reinsurers are more concerned about capital preservation, he said.
The challenge for Texas Capital Bank is to find a conservative investment strategy that satisfies the needs of both types of clients, he noted, delivering yield for captives while being bulletproof for reinsurers.
He cited government instruments as an investment that worked for both, being very safe but exposing investors to some market risk around liquidity. Money market funds offer better liquidity but lower yield, added Gartenberg.
“Money market funds offer better liquidity but lower yield.” Bryan Gartenberg, Texas Capital Bank
The low interest rate environment has boosted demand for high yield credit, noted Michael Ryan, head of insurance strategy at Sterling Capital. While 2008 was seen as a systemic event that threatened to bring down the whole financial system, 2020 has been a health event and has not threatened the system, giving investors more confidence to invest in high yield, he said.
Hoekema warned that captives are likely to be investing in a depressed interest rate environment for the foreseeable future.
“There won’t be a rebound in interest rates—even if we see inflation pick up a bit, the Fed is likely to let that run for a while,” he said. “Investors need to be ready for a low-forever interest rate environment.”
“In equities we are seeing correlation falling and dispersion increasing, so we see value in a solid equity bucket favouring dividends,” said Peter Princi, managing director of wealth management at The Princi Group.
He noted that growth stocks have outperformed value stocks by a considerable amount for around a decade, but predicted that could change.
“The S&P is currently weighted to growth but now is the time to rebalance,” he said.
Other panellists looked at the equity markets differently. Simon Smith, head of offshore corporate investments at Barclays, said he did not consider equities according to growth or value criteria but instead focused on quality, the prospects for the company and how they use their cashflows, favouring companies that invest in their business.
Michael Ryan, Sterling Capital
Peter Princi, The Princi Group
The divergence between the investment economy and the real economy is likely to grow, added Hoekema, with unemployment set to remain elevated even as risk asset classes perform well in the markets.
Gartenberg argued rates might rise sooner if there is a change of administration in the US at the forthcoming election than they would under a second term with Donald Trump. However, he agreed, rate increases in 2021 remained unlikely.
On the other hand, a different administration might invest more in projects such as infrastructure and healthcare, noted Gartenberg. “There is some uncertainty either way,” he said.
“The low interest rate environment has boosted demand for high yield credit.” Michael Ryan, Sterling Capital
Princi downplayed the likely impact of politics on markets in coming months.
“Whether it is Democrat or Republican that wins won’t matter; as long as it isn’t Bernie Sanders the markets won’t care,” he said.
However, Princi stressed the COVID-19 pandemic has caused a dramatic expansion of the Federal Reserve’s balance sheet which will have implications for years to come. Its balance sheet increased from $4.2 trillion before the outbreak to $7.2 trillion in just three months, he noted.
By comparison, after the 2008 recession the Fed had acted more slowly, waiting until 2010 to start printing money and taking five years to print $3 trillion. The Fed’s balance sheet had expanded by as much in three months this year as it did in five years after the 2008 crisis.
Its purchases have also been broader this time round, including not only sovereign but corporate—and even high yield—bonds. While its high yield bond purchases were limited in size, it was one of the main reasons the markets rebounded, said Princi.
Panellists emphasised the importance of managing portfolios with a view to ensuring liquidity is available, even in times of heightened market volatility, learning the lessons of 2020 and 2008.
Ryan said both crises had reminded investors that stocks that are very liquid in normal market conditions may not be when volatility increases. Investors should ensure a portion of their portfolio is invested somewhere it will offer liquidity even during a crisis, he said.
“You do not want to be forced to sell into weakness,” he added.
“The S&P is currently weighted to growth but now is the time to rebalance.” Peter Princi, The Princi Group
“Captives should review their investment objectives and strategies and consider whether they have fundamentally changed in recent months,” Smith advised.
“It is important to be deliberate about your strategy,” he said. “There is a tendency to throw the baby out with the bathwater at times like these, and make bad decisions, for example over-trading or allowing biases to creep into decision-making.”
Smith advised captives to plan properly and make decisions based on quantitative analysis rather than emotions or bias. “This will increase your chances of success tenfold,” he said.
He cautioned against making decisions based on market forecasts. “This industry is littered with crystal balls and broken promises,” he noted.
Simon Smith, Barclays