Yousif Capital Management
Reap the rewards of a robust investment strategy
Captives owners should review their investment strategies and take the opportunity to benefit from some of the best investment conditions since the financial crisis, Kevin Yousif of Yousif Capital Management tells Captive International.
“For most captives, it will make sense for the fixed income portfolio to be the largest component of a capital programme.”
Kevin Yousif
Yousif Capital Management
Economic conditions are such that now is a good time for captive managers and owners to earn solid returns on their investments without taking an exorbitant amount of risk. They should still, however, get some solid advice before experimenting in alternative asset classes or overseas investments.
That is the perspective of Kevin Yousif, president of Yousif Capital Management, an investment manager who specialises on advising captives on how to invest their capital—while navigating the regulatory restrictions captives have and planning for their core function: having cash available to pay claims.
But, Yousif says, it can be surprising how some captive owners fail to fully explore the multitude of investment strategies available. “Every captive owner has to carefully consider what to do with their cash—they should not simply leave it as an uninsured deposit at the bank. Whether they consider money markets or investments from the least risky to the riskiest, it is important to have a strategy and someone who can execute on that,” he says.
“Money markets come in all shapes and sizes and investors should ask how those money markets are being invested. Are they buying treasury and government securities or are they taking on additional corporate credit risk? Treasury investments may pay a lower yield, but they probably have a lower risk of default.”
An inverted yield curve
In terms of fixed income investments, Yousif notes that today’s environment is appealing as “there is an inverted yield curve whereby shorter-term bonds offer higher rates than longer term bonds. Short term treasuries are paying more than 5 percent right now and that is a great opportunity for all savers to take advantage of these rates that are outpacing inflation”.
“For most captives, it will make sense for the fixed income portfolio to be the largest component of a capital programme, because of the captive’s funding needs and requirements,” he explains.
“You can choose to be in a mutual fund or a separately managed account. We find that most mid to large captives choose to be in separately managed accounts for their flexibility and customisation features.
“In terms of risk tolerance, there are two levers you get to pull: length/maturity and quality. Both will impact your yield. In a normal environment, the longer you go, the higher the yield and so is the resulting volatility. Also, the lower the credit rating, the higher the yield. A lower credit rating can mean greater risk of default and so investors will demand a higher compensation from the borrower,” he adds.
Yousif notes that now is one of the best times he has seen in his career to be a bond investor. He says that government bond yields have increased more than 5 percent on certain maturities. “This is fantastic for investors. But your goal as a captive owner should still be, first and foremost, capital preservation. You have an obligation to pay out to the insured, so preservation of capital, with growth, is what you want to achieve.”
Consider all options
Yousif says there are essentially three ways to approach stock investing. The first is index tracking, where your portfolio replicates the performance of a widely known benchmark such as the S&P 500. He notes the fees are lower and, over the past decade, the return on the S&P 500 Index was more than 12 percent per year when measuring through June 2023.
“Index tracking has been one of the most consistent strategies. That is the ‘buy and hold’ strategy, while getting richer,” he says.
The second is to pick individual stocks using quantitative-based methodologies: for example, you can pick companies with a track record of delivering a growing dividend.
“We look for evidence that a company can be successful in good and bad times and we look for proof in the ability to grow the company’s dividend. You need confidence that a company can withstand the hard times such as a financial crisis or when a bubble bursts.”
The third option is to actively play the stock market. This is typically the most expensive strategy as it requires support from analysts and a lot of research on companies.
“That business can be lucrative, but it is fraught with winners and losers,” Yousif says. “And you will pay higher fees whether you win or lose.”
As to investment opportunities in international markets, Yousif acknowledges that emerging markets in particular can be attractive and offer lucrative returns. But given the volatility in the world at the moment, he suggests there are adequate investment opportunities in the US, and there may not be a need to look overseas.
“There’s enough diversification in the US stock market to provide access to those international markets—you can do this in the large cap space. Yes, there can be a lot of excitement around emerging markets, but given the geopolitical issues of today, I find that there’s enough diversification in the US.”
He notes that alternative asset classes such as private equity or direct real estate can be lucrative, but they are also typically the reserve of much bigger investors. “Unless you’re a very large captive, the chances are that most captives will not have the capacity for these kinds of asset classes,” he says.
On a related note, Yousif advises avoiding cryptocurrencies. “They’re having a tough time, although they are here to stay. I don’t have a place for cryptos in captives today because they’re too volatile. The regulatory uncertainty is also too high,” he says.
“Captive owners that have not reviewed their investment strategy for a while, should think again. Now is a good time to make solid investment returns with relatively low risk. Owners can make a good return focused on capital preservation first, and second on growth of that capital.
“We haven’t had a time like this since before the financial crisis of 2007/08. That was the last time we reached interest rates that were so high. Captives should take the opportunity to invest and grow their capital. Look for diversification of good companies, then buy and hold to reap the rewards.”
Kevin Yousif is president of Yousif Capital Management. He can be contacted at: kyousif@yousifcapital.com
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