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Straight in at number 1, catastrophe bonds top the charts


Catastrophe bonds may not be for everyone. They’re sophisticated assets and lower returns have reduced their attractiveness for some, of late. But the ability of the ILS asset class to deliver consistent, relatively stable returns with low-correlation over the longer-term, remains a key driver of interest.

For investors in search of a driver of investment returns that can provide a stable yield, which is attractive relative to other asset classes, has low volatility by every accepted measure and has low correlation to broader financial markets, catastrophe bonds and the rest of the insurance or reinsurance-linked investments space continue to be an attractive alternative in this low-to-negative interest rate world.

Another indicator of the increasing awareness in global investment markets of the stable returns that can be generated from investments in catastrophe bonds over the longer-term, came to light last week, as a cat bond fund topped the Consistent 50 investment fund charts from Morningstar.

The Consistent 50 is a ranking of investment funds, devised by Morningstar and published by Investment Week, designed to show the most consistent funds. Only funds with at least a three-year track record are included and are ranked against each other based on the consistency of their performance, position in the index and their returns.

At the last update the top fund is a new entrant to the Consistent 50, the UCITS catastrophe bond fund operated and marketed by investment firm GAM and managed by ILS and cat bond specialist Fermat Capital Management.

The GAM Star Cat Bond Fund, which has £962m ($1.28 billion at the end of June 2016) of catastrophe bond assets under management has just entered the Consistent 50 at number 1. An impressive way to announce yourself to those tracking this ranking.

The GAM Star Cat Bond Fund, a UCITS compliant offering, is managed by John Seo’s Fermat Capital ILS management team, one of the leading players in the market with near to $5 billion of ILS and cat bond assets under management.

The fund launched in November 2011 and experienced strong growth, as investor interest helped to drive inflows with it being among the first UCITS offerings for catastrophe bonds, as well as benefiting from the broad reach of GAM’s sales team.

Being catastrophe bond only, the GAM Star Cat Bond fund has managed to avoid many of the attritional losses which some ILS funds have faced in recent months, helping to preserve its history of stable returns.

Of course there haven’t been any major years of catastrophe bond impacting losses in recent history, with the only recent cat bond defaults being in 2011/12 and then last year’s MultiCat loss, meaning the fund has not faced an impact in some time.

But still this pattern of consistency is something seen across the ILS sector, when the returns of the asset class are viewed over the longer-term and against other, often more volatile asset classes.

With a three-year return of 14.5% and low volatility, the GAM Star Cat Bond Fund sits atop the Morningstar and Investment Week Consistent 50 for the moment.

Of course a really major catastrophe, such as a Florida hurricane or San Francisco earthquake, would see a serious negative return from any catastrophe bond fund. As we wrote recently, analysts believe a 1-in-200 year hurricane event could wipe out as much as 50% of ILS capital.

But with these generally considered as rare events, investors can look forward to relatively consistent returns over the longer horizon, one of the reasons the asset class is considered relatively sticky (as investors are generally considered better advised to remain invested in it, even after a loss).

Of course there is no reason we couldn’t see two major events in the same year, or one a year for ten years, which would undoubtedly cause the consistency angle to erode. Uncertainty in catastrophe event modelling means this can never be discounted, hence the asset class is most suitable for very sophisticated, institutional style investors.

But generally, when viewed across longer time horizons and using diversified portfolio approaches to investing, cat bonds as an asset class still look consistent the vast majority of the time when compared to other assets.

Investment Week explains what it means to top the Consistent 50:

The better a fund performs against its peers over a single period, the higher up the ranks it sits and the lower its decile rank.

An average of a fund’s decile rank as measured over the multiple time periods provides an indication of how much it moves up or down the ranks relative to its peers.

The fact that a catastrophe bond fund found itself at the top of this ranking will result in additional awareness of the ILS asset class among the global investor base and a greater recognition that consistent returns are possible from diversified investments in catastrophe bonds and insurance related risk.

Of course greater awareness of catastrophe bond investments while positive, can only be capitalised on if deal-flow increases and we see greater volume of issuance and while reinsurance prices remain so competitive, it is hard to foresee any big increase in cat bond issuance over the coming months.

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