Schroders ‘managing capacity’ of UCITS catastrophe bond fund

Investment management group Schroders continues to see strong inflows into its UCITS catastrophe bond fund strategy, which has forced the firm to actively manage the capacity of the fund and may result in its closure to new investors.

Schroders GAIA Cat Bond fund, which launched as a result of merging the Secquaero Advisors NGAR Secquaero ILS fund into Schroders Global Alternative Investor Access (GAIA) UCITS regulated hedge fund platform in October 2013, has been experiencing strong demand from investors in recent months.

As Artemis reported in January, the Schroders GAIA cat bond fund had grown from just over $100m on the 21st October 2013 to $430m by the 24th January 2014. The impressive growth has been the result of the reach of the Schroders investment management group and the broader access and recognition that a UCITS strategy can provide.

However, with strong growth come issues of capacity, particularly with a catastrophe bond only investment fund strategy in the current market environment. There just isn’t sufficient issuance of new catastrophe bonds to enable cat bond funds, like the Schroders GAIA Cat Bond, to soak up all the available demand and capital from potential investors.

High inflows of capital tend to mean that insurance linked securities and catastrophe bond funds end up soft-closed by their managers, as they wait for more opportunities to grow capacity with new investments. The Schroders GAIA Cat Bond fund is reaching that point, according to the firms senior executives.

Global Head of Distribution and Executive Vice Chairman at Schroders Massimo Tosato told analysts the importance of managing access to its funds; “We manage capacity, as you know, very carefully. It’s part of the quality of our offering and we are very careful in continuing managing it on a day-to-day basis.”

Schroders has had to close a number of equity funds in 2013 due to demand and has six funds soft-closed to new allocations, some of which are likely to be hard closed this year, Tosato said.

“We are also managing the capacity of the UCITS version of the catastrophe bonds because they’ve been so successful that we think we will have sold out the UCITS way to manage it by the end of April in just six months from launch,” commented Tosato on the Schroders GAIA Cat Bond fund.

So we can add Schroders to the list of investment managers who would like to see an increase in issuance of new catastrophe bonds. The appetite from investors is driving more investment managers to soft-close funds and the excess demand then results in every new cat bond issuance being soaked up by the market very quickly, typically oversubscribed.

To enable investment managers like Schroders to open their cat bond funds properly the catastrophe bond market needs to see a strong increase in issuance in 2014. Currently it looks unlikely that issuance will reach a level that would allow ILS managers to remain permanently open for business this year. The market may need to see a significant jump in activity and size to even come close to meeting investment manager and investor demand for the asset class.

Of course this is a sign of the popularity of the catastrophe bond as an asset among the investor community, a fact that will continue to put pressure on cat bond pricing making issuance remain attractive to potential sponsors. That should help to keep new deal flow coming, but it may take a major catastrophe event or shake up in the reinsurance market for issuance to spike.

Read our article from January: Schroders sees strong growth in cat bond and ILS assets.