Future Fund of Australia allocated $100m+ to ILS in 2015

by Artemis on February 1, 2016

Australia’s sovereign wealth investment organisation The Future Fund made a $100m+ allocation to insurance-linked securities (ILS), such as catastrophe bonds and collateralized reinsurance, through its mandate with Elementum Advisors in 2015.

According to the Future Fund’s latest annual report the AUD$117 billion sovereign wealth fund, which was designed to support the Australian government’s financial position by providing for unfunded superannuation liabilities, added the ILS allocation as part of its new focus on alternative risk premia investing.

It became apparent last May that the Future Fund had selected independent insurance-linked securities (ILS) and reinsurance-linked investment manager Elementum Advisors to manage an allocation to ILS and reinsurance risks, as part of its growth into alternative risk premia.

At the time the size of any investment was unknown, but now, thanks to the latest annual report, it seems that the Future Fund allocated somewhere north of $100m to an Elementum Advisors fund.

The Future Fund reports total alternative strategies assets as 12.7% of its total asset base, which is currently AUD $118.4 billion. 1% of that alternatives bucket is allocated to alternative risk premia, of which Elementum Advisors is the only manager.

So, based on where the Future Fund assets were in mid-2015 and using exchange rates from the time, it suggests that the allocation to ILS and reinsurance managed by Elementum Advisors could be somewhere from USD $100m to $120m.

The Future Fund has explained previously that it believes; “Insurance-based risks are time-varying risk premia akin to, but generally uncorrelated to, risk premia in the equity and fixed income markets.”

In its latest annual report the Future Fund explained that it made an allocation to ILS in 2015, saying that the investment “Provides capital for potential property losses suffered in natural catastrophes such as hurricanes and earthquakes by investing in “insurance-linked securities” such as catastrophe bonds and collateralised reinsurance contracts.”

The Future Fund appreciates alternative risk premia strategies as they add “attractive diversification
to the portfolio,” something the allocation to reinsurance and ILS will certainly provide.

Interestingly, the Future Fund reports a 100% equity holding in an Elementum vehicle, named the Elementum Tranquillus Fund Ltd, a Bermuda fund entity. Given the Future Fund reports an equity holding of 100% in this fund, it perhaps suggests that the structure is to be used to support the Future Fund’s mandate only.

For a major sovereign wealth fund with AUD$118 billion+ of capital to allocate a small amount into the ILS asset class is noteworthy as it is clear that the Future Fund believes ILS and reinsurance linked investments are compelling and provide the alternative risk premia diversification it seeks.

It will be interesting to watch whether the Future Fund looks to increase its ILS allocation over the coming years.

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