AXA IM's Francois Divet: Why insurance linked securities can offer investors diversification
"The ILS market is not affected by what happens in any one major economy, such as China, in the same way that other asset classes can be. Perhaps a good example of this is the fact that catastrophe bond (cat bond) risk adjusted prices remained stable throughout August (source: Swiss Re Capital Markets, August 2015), whereas looking at the global economy more broadly, many other asset classes suffered, including international currencies and global stock markets.
"Following the volatility of global financial markets in August, we can certainly see momentum in ILS with strong interest from European pension funds and family offices. This includes our own recent significant mandate win from a leading Dutch institutional investor.
"A key feature of the ILS asset class is its low correlation with traditional financial markets. For ILS, the underlying risk is tied only to the occurrence of major natural catastrophes, not to the wider economic outlook or the global financial environment. This means that the current major headaches for global investors such as the uncertainty around US interest rates and China's slowing economy, do not impact ILS, making it an attractive diversifier for portfolios.
"Additionally, cat bonds continue to see more attractive spreads compared to corporate bonds with the same ratings, which has been the case for over five years. This is because this asset class requires intensive sourcing and analysis capabilities, is less liquid than the general corporate bond market and comes with a premium. We believe that this, coupled with the low correlation to other assets and the wider market environment, make ILS a solid choice for portfolio diversification."
The opinions expressed here are the views of the author and do not constitute investment advice. This is not a recommendation to purchase, sell or subscribe to financial instruments, an offer to sell investment funds or an offer of financial services.
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