The Future Fund, an Australian sovereign wealth investor, has selected independent insurance-linked securities (ILS) and reinsurance-linked investment manager Elementum Advisors as its first investment manager to be focused on alternative risk premia.
The Future Fund is a AUD$117 billion sovereign wealth fund, designed to support the Australian government’s financial position by providing for unfunded superannuation liabilities.
The sovereign wealth fund has been investigating the ILS and reinsurance space, as a potential new asset class to add to its portfolio, for some time.
The Future Fund explained its research into ILS and reinsurance, as well as the reason for its appetite to access the asset class, in its most recent annual report:
Another key area of research in the past year, although thus far not resulting in investment activity, has been within Alternative Risk Premia. Reinsurance for property losses suffered in natural catastrophes such as hurricanes and earthquakes has traditionally been provided by specialist insurers, but in recent years a range of “insurance-linked securities” such as catastrophe bonds have opened the reinsurance market to the institutional investor base.
We believe that insurance-based risks are time-varying risk premia akin to, but generally uncorrelated to, risk premia in the equity and fixed income markets, and we continue to analyse the opportunity set with respect to “insurance as an investment”.
Now, Elementum Advisors, the Chicago headquartered ILS fund manager, has been listed as a manager on the Future Fund website, suggesting that an allocation has been made or is underway.
The Future Fund targets a return of CPI +4.5% to 5.5% per annum, a target that would suit a diversified and low to medium risk basket of ILS and reinsurance investments. Its mandate is to generate acceptable returns to support the Australian government, while not taking on too much risk.
At this time we understand that the Future Fund is not making a large allocation to the space, the current pricing environment does not currently warrant it for the Fund. However it seems that the Fund finds the asset class interesting enough to establish a relationship with Elementum and it will likely have made a small allocation to test its appetite for ILS.
For a super fund with AUD$117 billion of capital to allocate a small amount now to ILS is noteworthy. It suggests that the Future Fund believes ILS and reinsurance linked investments are compelling enough to bring into its portfolio now, even if only in a small way to begin, with the understanding that it could increase any allocation as conditions and its appetite permits.
That further demonstrates the attraction that large institutional investors have for ILS and reinsurance, once they have passed through due diligence and gained an education on the asset class.
It’s also noteworthy that, for the Future Fund, Elementum is the first investment manager to be listed as providing alternative risk premia. Alternative risk assets are increasingly becoming sought after by large investors seeking an element of diversification and de-correlation with wider financial markets. That should bode well for continued uptake of the ILS asset class.