Schroders launches Flexible Cat Bond fund, with cat bond lite angle

Investment management group Schroders has launched a new catastrophe bond fund strategy today. The Schroder IF Flexible Cat Bond fund has a mandate that will allow investments in private cat bonds, or cat bond lites, as well as 144A cat bond issues.

Schroders describes the Flexible Cat Bond fund as ‘cat bond plus’. The mandate allows up to 25% of the funds assets to be allocated to private cat bond or lite transactions, giving it access to more deal-flow, issuances from smaller cedents and additional diversification opportunities.

The 144A catastrophe bond deal pipeline has not been sufficient to allow Schroders to keep its main UCITS cat bond fund open to investors. In the past, like most other insurance-linked securities (ILS) asset managers, it has had to shutter its GAIA cat bond fund to new investors as deal-flow has not been sufficient to allow it to take on all the inflows that investors have shown interest in placing with it.

The launch of a fund with the flexibility to invest in private cat bond deals will also allow Schroders to acquire risks from transformed collateralized reinsurance deals, which could open up many more investment opportunities for this new fund.

Schroders says that the private placement catastrophe bonds can provide investors with a wider range of catastrophe risk perils, as well as allowing it to diversify on a cedent basis. The new Flexible Cat Bond fund is also allowed to take tactical short position hedges, such as industry loss warrants (ILW’s), in order to mitigate its own peak catastrophe risks.

Investing in cat bond lites, or private ILS transactions, is not permissible under a UCITS strategy. Similarly the hedging is not permissible for a UCITS cat bond fund. This provides a greater degree of flexibility for the fund, hence its name, allowing it to access better returns from private cat bond deals, while also enabling it to be better protected.

The investment focus for the Flexible Cat Bond fund will be across mature insurance markets such as the U.S., Japan and Western Europe primarily, where insurance penetration is higher and access to catastrophe risks is greater, although it can allocate to any region.

The Flexible Cat Bond fund will be managed by Daniel Ineichen, who manages the portfolios for Schroders range of ILS and cat bond strategies.

The new fund will target a return of cash (3 month USD Libor) + 6% per annum over an insurance cycle.

Tim van Duren, investment director for ILS at Schroders, commented on the launch; “We are very pleased with the launch of this new fund to complement our range of ILS strategies. Cat bond strategies not only provide our clients great diversification in a portfolio context, and we are very excited about the cat bond lite market which we expect to grow significantly in the coming years.”

As is typical of the all the Schroders catastrophe bond and insurance-linked securities funds, the firm will be working alongside specialist ILS and reinsurance firm Secquaero acting as investment advisors.

Schroders has been very successful with its range of ILS and cat bond funds, raising over $1.6 billion of capital for them, as at the end of December 2014. This new fund launch should help the manager to further grow its ILS assets under management.