UCITS ILS funds help to drive recent inflows of capital

The emergence of UCITS compatible catastrophe bond and insurance-linked securities (ILS) funds has helped to bring new capital into the ILS market, according to Michael Stahel, partner and portfolio manager at Swiss ILS and reinsurance-linked investment manager LGT Insurance-Linked Strategies.

The launch of a number of UCITS compatible ILS funds, including some which are managed by the LGT ILS team and a very recent UCITS cat bond fund launched by Schroders, has helped to entice predominantly new capital into the ILS market, Stahel said at an ILS conference held in London on the 25th September. The majority of this UCITS based ILS fund capital is new to the market, he continued, as some European investor mandates only allow them to invest in UCITS funds.

UCITS, or Undertakings for Collective Investment in Transferable Securities, is a set of European Union directives which are designed to allow collective investment schemes such as investment funds to operate throughout the EU on the basis of authorisation from a single EU member state.

This saves funds from having to register across multiple countries to be able to raise capital in them, although some restrictions do exist in certain countries in practice. Many institutional investors, such as pension funds, in Europe have mandates which compel them to seek out UCITS compatible investment opportunities and this appears to be assisting the ILS markets growth to some degree.

Some European pension funds cannot look to U.S., or Bermudian ILS funds as investments and even a non-UCITS EU domiciled ILS fund may not have satisfied their investment mandates. Hence ILS investment managers are launching UCITS funds, many residing in Luxembourg, as a way to tap into this new capital source.

Michael Stahel told us; “LGT convincing the European regulators to classify cat bonds as UCITS-eligible assets back in 2010 has clearly supported the growth of this asset class in Europe amongst more conservative investors. However, as a result of the spread compression in the ILS market, we are currently seeing the main interest amongst pension fund investors again focused on our non-UCITS strategies investing in collateralized reinsurance contracts.”

UCITS funds are just one way of tapping into new sources of capital for ILS fund managers. We have heard of ILS funds being denominated in Japanese yen, to enable better targeting of investors in Japan, for example. As the market matures, ILS managers will find new ways to attract capital from different categories of institutional investor. As this happens it will help managers grow to a size where they can then more cost-effectively target new opportunities, thus stimulating even more inflows of new capital to enter the ILS and reinsurance-linked investment market.