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Catastrophe bonds replace high-yield bonds for financial advisor


Catastrophe bonds, as a fixed income investment which currently offer higher yields than many so-called high-yielding bonds, are replacing more traditional sources of yield for one financial advisors clients.

In the current low-interest rate environment, many fixed income investment opportunities have lost attraction for investors and advisors alike. Within balanced investment portfolios, high-yield bonds have traditionally played a stabilising role offering reliable mid to high returns to help investment strategies meet targets.

With high-yield bonds no longer seeming particularly high-yielding, some financial advisors and investors have turned to catastrophe bonds as an alternative asset to replace the role of a more traditional high-yield fixed income asset.

John Waldron, who runs Waldron Wealth Management a top rated financial advisor to high-net worth clients and family offices, has embraced catastrophe bonds as a solution to low fixed-income investment yields, according to an article in Barron’s.

Waldron has been using cat bonds as a replacement for high-yield bonds in his clients’ fixed-income portfolios, finding that he can boost their investment portfolio returns without actually raising the risk profile, by swapping low-yielding fixed-income assets for cat bonds at an equivalent risk level.

As cat bonds, insurance-linked securities (ILS) and broader reinsurance-linked investments become increasingly accepted as an asset class it is expected that financial advisors and wealth managers will find ways to incorporate them into their strategies. Increasingly cat bonds are being seen in multi-asset alternative funds and while fixed-income yields remain low the profile of cat bonds will continue to grow in these more mainstream investment markets.

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