Plenum Investments, the Zurich based specialist catastrophe bond and insurance-linked securities (ILS) investment manager, has published a new market study and Index family, enabling UCITS cat bond funds to be compared for the first time, while improving the transparency of the cat bond marketplace.
According to Plenum, the market for cat bond funds in UCITS format, which was adopted in 2010, currently represents a 24% market share of the collateralised nat cat reinsurance business.
However, the strong growth of cat bond funds and the heightened number of funds in operation, as well the diversification of funds, the different risk models and lack of a risk presentation standard, “are still a challenge for investors,” explains Plenum.
In response, Plenum has launched a first of its kind market study and Index family designed to give investors an investment compass.
“On the one hand, this enables the fund offering to be matched with the personal risk- appetite of an investor, and on the other hand, it enables the performance and risks of individual funds to be compared with each other,” says Plenum.
Ultimately, the new Index aims to set a benchmark standard in the cat bond fund industry, while the study explores how ILS fund managers navigate the challenges of the cat bond market, and includes all funds that comply with the UCITS guidelines and invest directly and exclusively in cat bonds.
Plenum explains that its new set of Indices aim to reflect the returns of all cat bond funds available in the market in UCITS format. Calculated and published on a weekly basis, these are investible total return fund Indices only, and the reference currencies of the Indices are the US dollar, the Euro, and the Swiss franc.
Head of the market study and Index developer, Dirk Schmelzer, Managing Partner and Fund Manager at Plenum, commented, “This market survey makes CAT bond funds comparable for the first time by using the same risk model for all funds. We use specific risk indicators to analyze and illustrate the risk profiles of the individual funds.
“We show that there are significant differences between the funds in terms of risk diversification as well as exposures and that certain funds carry (tail) risks above average compared to their expected returns.”
Of course, Plenum manages cat bond funds and two its funds are part of the survey, which creates a potential conflict of interest.
In light of this, Plenum says that it’s placed great emphasis on the methodology of the survey so that results can be understood by an independent third party.
The comprehensive study highlights a number of themes in the cat bond fund marketplace, including that the risk profile of the funds and the number of positions held are clearly different.
Additionally, it shows that two types of risk exposure positioning have developed in the cat bond fund UCITS market over the past 12 years.
Plenum also states that the survey shows that the expected loss correlates positively with the return on investment (ROI) outlook, although the tail-risk of funds with similar return expectations can vary widely.
The firm says that this suggests that some funds manage their risk more efficiently than others.
The data also suggests that smaller cat bond funds may have an advantage, with an ability to be more focused in their allocation to cat bond names, over the larger cat bond funds that must invest more broadly to deploy capital assets.
The final conclusion highlighted by Plenum is that the tail risk of a fund is linked to its positioning profile and the diversification of the fund.
Plenum’s cat bond Indices and a study of them can be found here.
They provide a useful additional market insight tool and being based on real cat bond fund performance an invaluable source of data for investors and fund managers alike.