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Sterling Capital adds insurance-linked securities to mutual fund


Further evidence of the continued appreciation of insurance-linked securities (ILS) such as catastrophe bonds, and reinsurance linked strategies in general today, as Sterling Capital Management announced that it’s added ILS to one of its mutual funds.

Over the last few years there have been an increasing amount of more traditional asset management firms which have been adding alternative asset classes to their funds, with the insurance-linked asset class one of the beneficiaries.

Sterling Capital Management LLC is a registered investment advisor and an operated subsidiary of BB&T Corporation, located in Charlotte, North Carolina. The firm has announced the relaunch of a recently renamed Sterling Capital Diversified Income Fund, one of a roster of 22 mutual funds offering investors access to a huge range of asset classes.

The fund’s portfolio managers have expanded the range of asset classes invested in, beyond traditional equity and fixed income investments, to include non-traditional and alternative investments. One of the asset classes added, according to the manager, is insurance-linked securities, which it says offer investors “opportunities for additional income, diversification, and return.”

“With rates remaining near long-term historical lows, we recognize the increasing challenge in satisfying investors’ income needs,” said portfolio manager Shane Burke. “Leveraging our experience and expertise in the areas of asset allocation, manager selection, and portfolio construction, we believe we have identified a complementary mix of strategies that can provide a steady stream of income with moderate volatility.”

Sterling Capital’s Diversified Income Fund focuses on income and capital appreciation “by allocating capital across a diverse mix of income-generating asset classes and strategies.” By adding insurance-linked securities (ILS), such as catastrophe bonds and other reinsurance instruments, to this mix, the asset manager and investors in the fund can also benefit from the low correlation that ILS displays, compared to a wider investment universe.

By targeting a mix of traditional and alternative assets the fund may “allow investors to achieve income and proper diversification in one fund rather than allocating to multiple investments.”

Giving investors access to the ILS asset class in these diversified strategies is perhaps a good way for investors to begin to benefit from the qualities of insurance and reinsurance linked investments, as part of a portfolio.

Using a blend of both blend of active and passive management in order to hit targets, the fund will be structured as a “fund-of-funds,” which Sterling Capital says will “allow capital to be efficiently allocated and rebalanced as needed.”

At the 30th June, Sterling Capital was allocating to the Pioneer ILS Interval fund, with about 3.09% or $1.41m of the Diversified Income Fund assets currently allocated to ILS through Pioneer.

“We seek to provide a combination of current income and capital appreciation that meets or exceeds our shareholders’ long-term total return objectives,” said the funds other portfolio manager Will Gholston. “An analysis of historical performance illustrates that an income-oriented approach to investing has consistently delivered attractive total returns on both an absolute and risk-adjusted basis.”

As more investment advisors and traditional asset managers begin to add a component of ILS and reinsurance to their funds, it could help to stimulate further growth in ILS capital.

Consider the size of the potential market, if many of the world’s asset managers began to allocate some percentage of assets into insurance-linked securities (ILS). That could be a big deal for the market, as it was when the pension funds of the world gained an appreciation for the asset class.

As we move forwards and more asset managers learn about ILS and reinsurance linked assets, sub-advisory relationships and mutual fund-of-fund’s could become a new source of growth for ILS market capital.

Register today for ILS NYC 2023, our next insurance-linked securities (ILS) market conference. Held in New York City, February 10th, 2023.

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