Swiss Re Insurance-Linked Fund Management

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Plenum launches leveraged cat bond strategy, new share classes


Zurich based catastrophe bond investment manager Plenum Investments is expanding its reach with the launch of a higher return leveraged cat bond investment strategy as well as new institutional and trailer fee clean retail share classes for the Plenum Cat Bond Fund.

The insurance-linked securities (ILS) and catastrophe bond asset class has been receiving significant interest from investors, but issuance has sometimes not been keeping pace with the significant demand for the assets.

This has led specialist ILS and cat bond investment managers, such as Plenum, to devise new ways to provide investment opportunities to the interested capital as well as ensuring that the widest possible investor audience has access to their ILS strategies.

Plenum has launched a novel cat bond investment strategy which provides for a higher return to investors by using financial leverage to boost the possible return of a portfolio of catastrophe bonds. Plenum has teamed up with Swiss private banking group Julius Baer to create a leveraged cat bond investment opportunity.

The strategy uses a managed account at Julius Baer, containing an underlying portfolio of cat bonds and the possible returns from the cat bond portfolio are amplified using financial leverage. This is a smart way to provide a higher returning cat bond strategy to investors using a typical diversified cat bond portfolio.

CEO of Plenum Rainer Gruenig explained to Artemis; “Some of our potential clients have expressed their interest in ILS solutions with higher return expectations than 4 to 5 percent over money market returns. However, due to certain limitations in the global CAT bond markets higher returning portfolios are often more efficient to create through financial leverage than through riskier bonds. In order to come up with a respective solution Plenum was looking for a partner to launch a leveraged note on a conservative CAT bond portfolio.”

Plenum selected Julius Baer to assist it with the launch of this leveraged cat bond investment strategy. It’s the first such strategy using a leveraged certificate that Artemis has heard of, perhaps showing a further maturation of the ILS investment market as it provides innovative solutions to meet a wider spread of investor needs.

By applying financial leverage to an underlying portfolio of lower risk cat bonds Plenum can increase the possible returns to investors. This means that Plenum has a greater choice of cat bond issues to select from, as there are more cat bonds offering lower returns than high, yet the investors benefit from a boost to the returns of the strategy thanks to the leverage.

Rainer Gruenig explained more of the mechanics of the leveraged cat bond investment strategy; “The Tailored Solutions team at Julius Baer in Switzerland structured a certificate, actively managed by Plenum, where the underlying portfolio sits in a managed account with Julius Baer who provides a static 150% loan on the amount invested by the client (face value), hence creating a 2.5 times exposure. The leveraged amount is then invested in a diversified CAT bond portfolio where Plenum acts as adviser. Plenum applies the same investment guidelines as it does with its UCITS IV CAT bond fund.”

The strategy provides a number of benefits to investors and also to Plenum as investment manager, Gruenig told Artemis. For investors the strategy remains transparent, despite the addition of leverage they have full transparency on the underlying cat bond portfolio, since the securities are held in a Julius Baer managed account.

For investment manager Plenum it removes some capacity constraints, an issue in the current cat bond market where yields on new cat bonds have declined meaning that high yielding opportunities are harder to come by. Plenum can offer the higher yielding leveraged cat bond note to investors without any constraints on capacity given that the return of the available investment opportunity is driven by the leverage which then tracks above the underlying cat bond portfolio returns.

Investors also have liquidity, another plus in this unique cat bond strategy. Gruenig explained; “An additional benefit is that the note’s general liquidity terms are weekly with Julius Baer providing a secondary market with daily trading. The JB Actively Managed Certificate was issued on 30th December 2013 in USD and the denomination of 1 certificate is USD$100,000.”

This is a really interesting way to create a new cat bond strategy using financial leverage. It overcomes a number of issues faced by investment managers, such as how to create higher returning investment capacity when issuance is not delivering enough primary issues of this kind. It also allows an investment manager to offer a higher return strategy when coupons have been coming down, without having to invest in the riskiest tranches of cat bond notes available.

Separately, Plenum Investments has also launched new share classes for its Plenum Cat Bond Fund. The fund is now available by both institutional and trailer fee clean retail share classes, with both new share classes available in USD and hedged EUR and CHF share classes.

Plenum has also introduced a distributing retail share class for European based investors for tax reasons as it can be more efficient for these investors.

Finally, Plenum has switched its fund custodian bank to use Banque Pasche (Liechtenstein) SA, part of the Credit Mutual CIC group, who took over this role on the 13th January 2014 with no additional cost to investors.

The addition of the new share classes will give Plenum greater access to investors by enabling it to provide more options for how they can access the cat bond fund, as such it should help to increase the asset managers reach.

The leveraged cat bond investment strategy is particularly interesting, as again it will increase Plenum’s reach but also with reduced capacity constraints could allow it to grow much more rapidly. In future the manager could choose to launch a number of different leveraged strategies, with different return targets above the underlying portfolio return to meet specific investors requirements.

This strategy could give ILS managers a significant boost in flexibility and help them to attract more investors and greater levels of assets under their management. It will be interesting to follow Plenum’s success with this leveraged cat bond fund approach.

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