Two UCITS catastrophe bond investment funds have been cited as among the top performing UCITS credit strategies of 2014, at a time when investors searching for fixed income and credit allocation options have been struggling.
Both the fixed income and credit markets have been challenging for investors, with government bond yields at record lows and many alternatives not performing as expected, forcing investors to look further afield and to explore new asset classes.
One of the beneficiaries of this search for more stable and attractive returns has been the insurance-linked securities (ILS) space which has experienced record inflows of new capital thanks to its attractive performance and low volatility.
However, some investors can only allocate capital to liquid alternative strategies and for more it is a case of UCITS only, as their mandates insist on the specified level of liquidity that a UCITS fund offers. Investors which allocated to ILS and catastrophe bond UCITS strategies will have been pleased in 2014 to see that their selection was among the best performing of this type of fund.
Absolute Hedge, a provider of hedge fund insight and analysis, reported that two out of the top performing credit were catastrophe bond strategies.
The GAM Star Cat Bond Fund, which is portfolio managed by cat bond and ILS specialist investment manager Fermat Capital Management, is listed as the second highest performing UCITS credit strategy of 2014, according to Absolute Hedge.
The Schroder GAIA Cat Bond Fund, portfolio managed by Schroders with investment advice, risk modelling and selection provided by ILS specialist Secquaero Advisors Ltd., is listed as the third highest performing UCITS credit strategy of the year.
The two funds reported annual returns of 4.7% and 4.4% respectively, which while lower than cat bond strategies have achieved in recent years has still been sufficient to see them listed as in the top-tier of UCITS credit strategies.
Georg Reutter and Matthew Barrett of Kepler Partners a fund research and distribution business and the owners of Absolute Hedge, said in a recent article in Hedge Fund Insight “The liquid alternative space has undoubtedly gained from this trend with several strategies reinventing themselves as fixed income alternatives. One such sector is the catastrophe bond market which has seen significant assets flow over the past year.”
The two also note the reducing returns in cat bonds, saying that after another loss-free year resulting in good returns 2015 may not see anything any higher from the cat bond funds. Of course that will depend on the available coupons of 2015 cat bonds and whether there enough higher-yielding bonds to boost returns.
As investors increasingly discover the qualities that investments in catastrophe bonds, or other ILS, can add to their portfolios, the interest in these funds will likely grow. Having performed admirably in 2014 and been highlighted as top performing UCITS credit strategies will only help the awareness of cat bond investments to increase.
– Swisscanto favouring ILS investments over government bonds.
– Cat bond market averages 8.33% annual growth since 2002: Swiss Re.
– Swiss pensions look to ILS as alternative asset, but regulation hinders.
– Pension funds appetite for alternatives increases, positive for ILS.
– ILS and cat bond investors. Yield hungry? Or seeking asset qualities?
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