Plenum Investments AG, the Zurich based specialist insurance-linked securities (ILS) and catastrophe bond investment manager, has announced the launch of a new higher-yielding catastrophe bond fund strategy, called the Plenum CAT Bond Dynamic Fund.
The manager says that this new offering rounds off its range of cat bond funds, to provide something for investors seeking more dynamic or higher-yielding returns from catastrophe bonds, while also promising to protect those returns by not over-stretching the strategy.
Plenum believes that there is an optimal size of a higher-yield cat bond fund, based on the market as it is today, and that some providers are now stretching their portfolios by raising assets, forcing them to invest in lower-yielding issuances, or to take on more aggregate risk, which can affect cat bond fund outcomes, the manager said.
Plenum’s new CAT Bond Dynamic Fund is a UCITS Fund which has been classified as Article 9 compliant, under the Sustainable Finance Disclosure Regulation, so offers investors a level of ESG compatibility.
The objective of the new cat bond fund is to achieve an excess return with market-like tail risks, Plenum said, and the manager will use a similar strategy to its flagship cat bond fund to manage and compress tail-risk, avoiding excessive risk concentrations and thereby lowering loss potential.
Dirk Schmelzer, Head Portfolio Manager ILS / CAT Bonds and Partner in Plenum Investments Ltd., commented on the launch, “Instead of emulating the CAT bond market, we make quality the investment focus by minimizing the share of aggregate CAT bonds exposed to secondary risks, thus strengthening our position versus the market. Despite the resulting restriction of the investment universe, our approach enables us to select items with a high risk compensation and a low correlation to each other.”
David Strasser, Senior Portfolio Manager and modeling expert, added, “Maintaining the selectivity in an already limited market segment is only possible through a self-imposed limit of the maximum investment capacity of USD 0.4 billion or 1.5% market share. This is a clear commitment to our clients.”
The fund’s investment strategy will focus on three main pillars, the manager said. First, maximising global diversification of the portfolio; second, refining diversification in the US hurricane portion; and third, limiting the risk of high-frequency events through reduced aggregate exposure.
Schmelzer added, “The Plenum CAT Bond Dynamic Fund is an exclusive investment fund and a quality leap in the high-yield CAT bond fund segment.”
Plenum has timed this launch as it believes that the investment capacity of UCITS Cat Bond Funds in the higher-yield investment segment has been exhausted, a reference to the fact some funds have become so large that they have to look outside the universe of higher-yield cat bonds to deploy capital, the manager believes.
Plenum says that some cat bond funds now find themselves pressured to “buy the market”, as with capital to deploy they need paper to support that and have to invest in the majority of new cat bonds, whether they meet a high-yield strategy or not.
Also, the timing is assumed positive given the fact insurance premiums are still attractive and demand for reinsurance coverage continues to be strong, while catastrophe bond issuance has been robust this year.
As a result, Plenum believes that its new funds capacity will be easily absorbed by the cat bond market.