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IOL News
5 days ago
- Business
- IOL News
Understanding private assets: a guide for new investors
Explore the growing trend of private assets in investment portfolios, understand the benefits and risks, and learn how to navigate this evolving market as an individual investor. Image: File Over the next few years, individual investors are expected to increase their allocation to private markets, in some cases potentially approaching levels seen by various types of institutional investors. The compelling return history for private market investment is clearly a key motivator for these allocations. Schroders Capital research shows this is the main reason institutional investors enter private markets, and we have no reason to believe individual investors think any differently. Over the past five years, smaller clients have also been offered more options to invest in private markets thanks to product development, changing regulations, and technological advancements. New regulated fund structures such as the long-term asset fund (LTAF) in the UK, the European long-term investment fund (ELTIF) in Europe, and UCI Part II have been a game changer for accessing private markets, as well as for the increased use and further development of evergreen open-ended funds. While promoting access to private markets with these new structures, regulators around the world have also been tightening rules to protect smaller investors. For example, in the UK, clients must confirm they meet certain investment criteria, undergo a suitability review by their financial advisor, and have a 24-hour cooling-off period to reconsider their decisions. The South African regulator requires investors to meet the criteria of a qualified investor as per the definition in section 96(1)(a) of the South African Companies Act, No. 71 or 2008 as amended, and/or to have a minimum of R1 million to invest in terms of section 96(1)(b) of the South African Companies Act. Bain & Company estimates that by 2032, 30% of global assets under management could be allocated to alternatives, with a large chunk in private assets. While private investors currently allocate only up to 5% of their portfolios to private markets, we anticipate that the gap with institutional investors will narrow significantly over time, and private markets will become commonplace. The growing appeal of private markets Of course, returns aren't the only reason to use private assets, even if it's high on the client's agenda. Characteristics like stable income and genuine diversification, which have the potential to significantly enhance overall portfolio resilience, add to the appeal. It is also about the opportunity set. In public markets, there is an increasing concentration of stocks, with more than 30% of the S&P 500 dominated by just a handful of companies, leading to a narrower range of options. In contrast, the number of private companies, and those staying private for longer, continues to grow. Private companies in the US with revenues of $250 million or more now account for 86% of the total. Additionally, the number of public listings in the US has more than halved over the past 20 years compared to the period from 1980 to 1999, highlighting the shift towards private market opportunities (see chart). In South Africa, the last five years have seen an average of 24 companies delist from local stock exchanges on an annual basis, although 2024 showed a significant slowdown in this rate as only 11 companies exited the public market. The Johannesburg Stock Exchange is also highly concentrated, with a few large companies dominating the index. And it's not just a matter of numbers. Private companies tend to be more agile and innovative in their operations compared to public companies, and they can access opportunities in sectors where public companies have limited or no reach. For example, the new US tariff policies are likely to affect both public and private companies, particularly those vulnerable to supply chain disruptions. However, private companies tend to be more flexible in restructuring their supply chains to adapt to these changes, potentially avoiding cost increases. Nevertheless, companies heavily impacted may still face higher costs, affecting profitability, and therefore valuations and deals. Public markets continue to shrink, and companies are staying private for longer Number of public listings per annum in the US vs PE-backed. Image: Supplied. Once the decision to allocate to the asset class has been made, what is next? How do investors actually start their private assets journey, and what can they expect the journey to look like? Pacing is different One of the key differences with private asset investment is in the pacing of capital deployment. With no immediate secondary market to provide liquidity, allocations can and should be structured to, in a sense, create their own liquidity. Structured correctly, private asset allocations can become 'self-sustaining' over time, with distributions and income funding new investments to maintain a target allocation. What does that mean in practice? Many fund managers, or general partners (GPs), raise capital every year in what is known as 'vintages'. Each vintage represents a discrete fund that has an investment phase and a harvesting phase. The investment phase is when the capital is put to work, typically for about 3-5 years, depending on which part of the private assets market it's in, and what the market backdrop is like. The harvesting phase is when the invested assets are exited, generating capital that can be distributed back to investors. This is typically around 5-7 years after the investment is first made in what is known as an 'exit'. Private equity managers will use the term 'exits' because, while selling an asset is an option, it's only one of many options available. The routes to exit are varied but most commonly the company is either floated in an IPO (initial public offering), sold to another corporate buyer or private equity investor, or sold into a continuation vehicle. In private debt, the fund managers (there is often a cohort of lenders) will structure lending in such a way that the capital is returned at the end of a defined timeframe, having received the cashflows. These cashflows can then be used to refinance ('re-up' is a term often used) subsequent vintages. Private assets portfolio becomes self-financing after 5-7 years Private assets portfolio becomes self-financing after 5-7 years. Image: Supplied. In recent years, new exit routes have emerged, especially in the secondary market, with the continuation vehicles mentioned above. That's because these deals allow the GPs to provide a liquidity mechanism to their existing investors, the limited partners (LPs), while at the same time holding onto key assets for longer to maximise value. Continuation funds have evolved to become a common strategy for GPs to hold onto high-performing assets, or pools of assets, beyond the life of the original fund. Vintage years, consistent deployment, and the impact on returns A vintage year allocation approach has the benefit of mitigating the risk associated with market timing. Despite our optimism for the mid-to-long-term outlook for private assets, the near term is undoubtedly going to be challenging for many investors, and keeping up a steady investment pace may be difficult. While exit and fundraising activity seemed to have bottomed out in 2024 following a prolonged slowdown since 2022, risks and uncertainty in markets have increased sharply since the start of the year. As we pointed out above, this is mainly due to the uncertainties caused by the US government policy changes and the impacts these may have on economies and markets. In addition to broader concerns over performance, when markets fall, some investors face the 'denominator effect'. Private assets tend to correct less than other more liquid asset classes due to the way they are valued, so their relative weight in an investor's portfolio tends to increase when markets fall sharply. This can limit investors' ability to make new investments into the asset class and maintain a determined percentage allocation. Nevertheless, research suggests investors don't have to shy away from new investments in periods of crisis or recession. A recent analysis from Schroders Capital shows that private equity consistently outperformed listed markets during the largest market crises of the past 25 years. Despite challenges such as high interest rates, inflation, and economic volatility, private equity outperformed public markets and experienced smaller drawdowns, with distributions becoming less volatile over time. Meanwhile, recession years tend to yield vintages that perform exceptionally well. Structurally, funds can benefit from 'time diversification', where capital is deployed over several years, rather than all in one go. This allows funds raised in recession years to pick up assets at depressed values as the recession plays out. The assets can then pursue an exit later on, in the recovery phase, when valuations are rising. For example, our analysis shows that the average internal rate of return ('IRR') of private equity funds raised in a recession year has been higher than for funds raised in the years in the run-up to a recession, which, at the time, probably felt like much happier times. For private debt and real estate, there are similar effects. For infrastructure, the effects should also show a similar pattern; however, longer-term data is limited in this part of the asset class. Private equity vintage performance (average of median net IRRs) Private equity vintage performance (average of median net IRRs). Image: Supplied. Past performance is not a guide to future performance and may not be repeated. Source: Preqin, Schroders Capital, 2022. There are 9,834 funds in the Preqin database. Only funds with vintage years after 1980 and 2017 are analysed. 220 funds that were out of distribution were excluded, reducing the number of funds in our universe to 3,400. Private equity-only investments, venture debt, and funds of fund strategies have been excluded. Pacing illustration for an investor Appropriate allocations to private assets will, of course, vary by client and will always be led by overall suitability. Important factors such as a client's overall income and expenditure, time horizon, investment understanding/experience, appetite for borrowing, and ability to tolerate illiquidity are all factors we consider when deciding on exposure to private assets. For the sake of illustration, though, let us assume all individual clients fall within one of four risk brackets: cautious, balanced, growth, and aggressive. What would the investment pacing look like for the private asset allocation? For a client on a growth risk mandate (this would mean a typical exposure to equities of between 50-80%) who has a good understanding of investments, a target allocation of 20% might be appropriate across private debt, private equity, and real estate. How private assets could fit within a portfolio How private assets could fit within a portfolio. Image: Supplied. It's important to note that the nature of investing in private assets means that allocations should be built up over time to ensure vintage diversification and that we explicitly recommend diversification by investment and vintage. While we want to diversify by asset class, we also suggest spreading investments across a range of structures. This usually depends on the investable assets and the investor's ability to accept illiquidity, noting that private investors could benefit from different structure types. For example, clients with large investable asset bases that have the ability to lock up their money for 10 years plus, can use the traditional routes, such as closed-ended structures. Otherwise, clients with lower minimum entry points and with an uncertain time horizon are able to use 'evergreen' open-ended funds: these funds do not have a pre-determined lifespan and can run in perpetuity, recycling investment proceeds and raising new capital as required. While clients investing in evergreen funds are able to access their money periodically, they need to understand these are still long-term commitments and that there are established limits and rules on when and how much they can withdraw. It's important that investors be educated and prepared for their allocation to be left untouched for an extended period. Private equity funds typically run for at least seven years, during which time the allocation will not be liquid. The realisation of the assets will also take several years, tapering down in the same way the allocation is gradually ramped up. This is why a complete, ongoing understanding of a client's overall financial position is crucial when considering building a private assets allocation. Private Assets - Investment risk: Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. Investors should only invest in private assets (and other illiquid and high-risk assets) if they are prepared and have the ability to sustain a total loss of their investment. No representation has been or can be made as to the future performance of these investments. Whilst investment in private assets can offer the potential of higher than average returns, it also involves a corresponding higher degree of risk and is only considered appropriate for sophisticated investors who can understand, evaluate, and afford to take that risk. Private Assets are more illiquid than other types of investments. Any secondary market tends to be very limited. Investors may well not be able to realise their investment before the relevant exit dates. * Krekis is a portfolio director at Cazenove Capital, part of the Schroders Group. PERSONAL FINANCE
Daily Maverick
20-05-2025
- Business
- Daily Maverick
Under pressure but picking up — the state of Africa's real estate markets
Africa's real estate sector is neither collapsing nor booming but is pivoting towards solar-powered malls, cold storage hubs, data centres and housing. A cocktail of Covid-related aftershocks, sovereign debt crises, rising interest rates and fiscal strain has left the African real estate sector bruised, but not broken. A reshuffle, pushed by return-to-office mandates, climate pressures, digital expansion and population growth, is under way. 'We are now seeing increasing evidence of a recovery in pricing,' noted Nils Rode, CIO at Schroders Capital. 'Deal volumes and transaction pricing [are] showing positive trends.' Dr Kunle Awolaja, president of the African Real Estate Society, also noted that the size and value of the formal real estate market in Africa have shown 'significant growth' over the past five years and are projected to continue on this upward trajectory. Across the continent, there is no one-size-fits-all. 'Each market is in a different state of development or recovery,' said Adeniyi Adeleye, head of real estate finance for Africa regions at Standard Bank. SA – resilience by the square metre South Africa, home to one of Africa's largest property sectors, might not be leading the pack, but it is still taking part in the race. 'If you look at the South African property markets, you would find that there was pressure during Covid, and that pressure has somewhat eased out,' Adeleye said. 'Latest statistics talk about the office space having bottomed out… the retail [market] recovered quite quickly post-Covid.' According to Simon Fiford, senior vice president of real estate coverage at Standard Bank, the bank estimates that South Africa's commercial real estate sector is valued at about R1.9-trillion, up from R1.3-trillion in 2015. Add to that the residential market, worth R6.9-trillion, and the total property market exceeds R8.8-trillion as of the end of 2024. This rebound hasn't reached every corner. 'The structural undersupply of affordable housing in the country remains a challenge,' said Fiford. 'Government-subsidised housing makes up 32% of residential units or about 2.18 million homes.' Residential represents nearly 90% of South Africa's total property volume, according to the Centre for Affordable Housing Finance in Africa, underscoring their centrality to household wealth, Fiford said. Infographic by Kara le Roux 'There are big residential clusters in South Africa,' Adeleye observed. 'But from that multifamily housing investor class or subsector is still something that is developing in South Africa.' Multifamily housing refers to residential properties designed to accommodate multiple households in the same building or within a complex of buildings. Return to office Africa's office space market is finally starting to stabilise after the pandemic. 'We found that in the rest of the continent, people went back to the office a lot quicker than in South Africa,' Sandile Mpanza, head of commercial property finance Africa region at Absa Corporate and Investment Banking, said. According to Adeleye, in markets such as Nairobi, Accra, and Lusaka, the return to office was at a 'much faster pace' compared with South Africa. 'Most homes were not designed long-term for permanent users' work,' Adeleye said. Power outages, poor connectivity and small living spaces made remote work in Africa unsustainable. Green A-grade office spaces are attracting tenants. 'Demand for high-quality, ESG-compliant office spaces is rising,' Awolaja said, 'with some developers refurbishing older buildings to meet these standards.' 'What we are seeing is a flight to quality,' Adeleye said – B-grade and C-grade office spaces would continue to struggle. Retail's rebound Retail real estate, surprisingly, may be Africa's comeback kid. In addition to lower vacancy rates in the sector, Fiford said, the increased adoption of solar PV is being used to manage operational costs. 'There's a noticeable trend towards the formalisation of the retail sector, with a significant increase in formal retail spaces, especially in urban centres,' Awolaja said. Urban mixed-use precincts are also reshaping how developers think about retail, according to global real estate agency and consultancy Knight Frank's Africa Report 2024/25. 'The global trend of the live-work-play model is driving demand for mixed-use and community living developments,' the report reads. 'These developments cater to the preferences of modern consumers who seek convenience, accessibility and a sense of community in their retail destinations.' How does this affect you? Pension funds and your portfolio: If your retirement savings or investments are tied to large institutional funds, understanding African real estate's risks and returns helps explain their performance and what your fund manager might do next. Rising rents and relocations: Shifts in investor appetite and infrastructure upgrades (or lack thereof) affect commercial and residential prices. Your business ambition: For SMMEs and entrepreneurs eyeing cross-border expansion, understanding regional real estate dynamics could make or break your next move. Policy, politics and property rights: As some governments grow weary of foreign influence and others dangle tax incentives, the outcome shapes how your country and continent is built, sold and owned. The residential riddle 'You're seeing a lot of interest in residential property across a number of the key markets, affordable residential properties,' Adeleye said, adding that Covid made this market's importance impossible to ignore. The big bottleneck in this sector is end-user financing. 'High domestic interest rates mean that the end-user finance mortgage [is] available but not very affordable. By the time you're paying 17, 18% on mortgage rates, the affordability thresholds are somewhat eroded,' Adeleye said. With African office and retail sectors stabilising, residential is becoming the next frontier. 'The traditional real estate segments, such as offices and retail, are kind of taking a bit of a back seat,' he said. 'They're sort of in a holding pattern, for lack of a better word, and then there's a renewed focus and shift to residential.' Awolaja noted that governments across Africa are focused on addressing the 'significant housing deficit' on the continent to create opportunities for developers in the affordable housing segment. Warehouses, wires and walkways Investor appetite in Africa is growing in so-called alternative real estate assets. 'What you saw dominating global investor appetite was retail assets along with commercial office buildings,' Mpanza said. 'What you're now seeing is the advent of more … I don't want to call it alternative, but other segments within commercial real estate.' Data centres have become important to Africa's digitisation. There are 198 listed data centres across the continent, according to DataCenterMap, with clusters in South Africa, Kenya and Nigeria. 'The growth of the digital economy and online retail is driving a surge in demand for data centres across the continent,' Awolaja said. Cold storage is also heating up. 'There is a need to build that infrastructure and ensure that food security is a national priority,' Adeleye said. The African food cold chain logistics market is projected to grow from $9.9-billion (about R177-billion) in 2025 to $14.5-billion (R260–illion) by 2030, according to Mordor Intelligence. Student accommodation is another hotspot as Africa's young urban population grows. 'In markets like Nigeria and Ghana, you're seeing a growth in educational services,' Adeleye said, partly driven by the entry of international education players. Kenya stands out as an attractive market for Mpanza, as it goes hand in hand with the continent's best tertiary institutions. Future projections for the African real estate market are optimistic, Awolaja said, but warned that overcoming challenges relating to affordability, infrastructure and regulatory frameworks is crucial to realising the market's full potential. DM
Scotsman
30-04-2025
- Business
- Scotsman
Landmark Edinburgh hotel likened to a walnut whip sold in key deal
'The hotel itself has become an iconic landmark within the city centre' – Ed Webb, Nuveen Sign up to our Scotsman Money newsletter, covering all you need to know to help manage your money. Sign up Thank you for signing up! Did you know with a Digital Subscription to The Scotsman, you can get unlimited access to the website including our premium content, as well as benefiting from fewer ads, loyalty rewards and much more. Learn More Sorry, there seem to be some issues. Please try again later. Submitting... A landmark Edinburgh hotel that has divided opinion since it opened less than two years ago has been sold. Schroders Capital, part of asset management giant Schroders, has acquired the distinctive W Edinburgh hotel from Nuveen Real Estate in a property investment deal, for an undisclosed sum. Advertisement Hide Ad Advertisement Hide Ad The 244-bedroom hotel, which incorporates a ribbon design and 360-degree views of the capital and has been likened to a walnut whip, among other things, opened in November 2023 at the heart of the £1 billion St James Quarter retail and leisure complex. Nuveen Real Estate put the hotel up for sale last year and some reports had suggested a price tag in excess of £100 million. The W Edinburgh hotel under construction at the city's St James Quarter development. Picture by Lisa Ferguson Marriott International's W Edinburgh was the first W Hotel in Scotland, offering luxury accommodation and dining options. James Macnamara of Schroders Capital said: 'The addition of the W Edinburgh to our portfolio is hugely exciting, as we continue to identify top-tier hotel assets that can facilitate multiple ways to create value and offer significant long-term growth potential. 'Edinburgh is an attractive market for Schroders Capital and we look forward to working with the highly experienced and agile team at the hotel to ensure guest experience remains in line with the W brand quality and ethos.' Advertisement Hide Ad Advertisement Hide Ad
The Herald Scotland
29-04-2025
- Business
- The Herald Scotland
Landmark Scottish £1bn development centrepiece hotel sold
W Edinburgh, Marriott International's first luxury property in the market and the first W Hotel in Scotland, opened November 2023 and was put on the market in June last year. The hotel is situated in the new St James Square Quarter. The hotel building from the ground. (Image: Gordon Terris) It comprises the Ribbon Building, James Craig Walk and the Quarter House. James Craig Walk is a heritage listed terrace named after the Scottish architect, dating from 1775. The newly-built Quarter House design was inspired by traditional Edinburgh architecture, interlinking with the 12-storey Ribbon Building which features 360 degree views over the city. Schroders Capital currently manages its £3.1bn of investments in hotel businesses operated by a team of 40 people located in offices in London, Paris, Milan and Amsterdam. READ MORE: James Macnamara, of Schroders Capital, said: 'The addition of the W Edinburgh to our portfolio is hugely exciting, as we continue to identify top-tier hotel assets that can facilitate multiple ways to create value and offer significant long-term growth potential. 'Edinburgh is an attractive market for Schroders Capital and we look forward to working with the highly experienced and agile team at the hotel to ensure guest experience remains in line with the W brand quality and ethos.' Ed Webb, of Nuveen, said: 'The completion of the sale of the W Edinburgh marks a considerable milestone for St James Quarter as the first transaction realises over a decade of planning and development to deliver a leading destination in the heart of Edinburgh and the completion of a vision shared by our investors. 'The hotel itself has become an iconic landmark within the city centre whilst also providing a best-in-class offering worthy of Edinburgh's status as a global tourist destination and recognised by being awarded Scottish hotel of the year 2025.' Schroders Capital and its clients were advised by CMS and Carey Olsen. Nuveen Real Estate was advised by Savills and Eastdil Secured, Herbert Smith Freehills and CMS, and EY.
Zawya
29-04-2025
- Business
- Zawya
Navigating volatility: The strategic advantage of insurance-linked securities
Stock market volatility, as measured by the VIX index for the S&P 500, recently reached the highest level since the Covid-19 pandemic, five years ago. Meanwhile, global government bond yields are rising sharply as markets digest rapidly increasing sovereign debt ratios. Schroders has warned before of the unintentional risks for investors who do not make deliberate, active choices in a world that has become geopolitically and economically much more uncertain. We have also championed the benefits of portfolio diversification, to enhance downside protection, bring potential return opportunities, and, importantly in the current climate, gain exposure to alternative sources of income. In this context, it is worth considering the potential benefits of insurance-linked securities as a valuable (and perhaps the only truly) uncorrelated source of income within a diversified portfolio – and one that has generated exceptional performance over both recent years, and the longer term. What are insurance-linked securities? For the uninitiated, insurance-linked securities are a form of protection bought primarily by reinsurers, but also some corporations and public entities, against the risks associated with specific, catastrophic natural events, for example hurricanes. The best-known part of the market is catastrophe bonds, or 'cat' bonds, which are conventionally tradeable securities that have a three to five-year lifespan. There are also a wide range of privately agreed, non-tradeable securities contracts that have shorter lifespans and provide exposure to a wider range of insurance risks. In all cases, the securities are issued by special purpose vehicles, into which capital provided by the end investors in the securities is paid. Those vehicles are backed by a collateral account funded by the proceeds from the issuance – and which in turn invest in low-risk instruments such as money-market funds that supplement the income yield paid to investors from the underlying insurance premium. The structure means that reinsurers are covered in the event that the insured event occurs – and investors are not exposed to credit risk of either the reinsurer or the issuer, as the capital that would be used to meet payouts is held separately in a trust account. How insurance-linked securities are structured Source: Schroders Capital, March 2025. Proceeds include from share or bond issuance. Return and payouts include return on collateral, collateral return to investors at maturity, and/or collateral to cover loss payments. Coupon is made up of risk premium + return on collateral. Attractive yields Taking a look at the recent numbers, the Swiss Re Global Cat Bond index, which is the key reference point for the publicly listed bonds that are the most well known part of the asset class, was up 17.3% in 2024 and 19.7% in 2023. Both of these were record years, so it is fair to characterise them as outliers. However, since the index was launched in 2002, cat bonds have generated overall performance that has beaten every asset class with the exception of global equities in terms of annualised returns. Fundamentally, therefore, the asset class has generated returns equivalent to investments that entail much higher levels of volatility (see chart). This reflects the nature of the risks involved; the higher coupon rates typically available are designed to compensate investors for taking on insurance risk related to low probability, but high severity, events. Cat bonds vs other asset classes since 2002x Source: Bloomberg, Swiss Re, Schroders Capital. Data from 31 December 2001 to 31 January 2025. Cat bonds: Swiss Re Global Cat Bond TR Index, Global Equities Developed: MSCI World, High yield bonds: BofA Merrill Lynch Global High Yield Index, Emerging Markets Debt: JP Morgan EMBI+, Commodities: S&P GSCI, Investment grade bonds: Bloomberg US Corporate Bond Index, US Treasuries: BofA Merrill Lynch US Treasury, Hedge Funds: Credit Suisse Hedge Fund Index. Cat bonds positive if index negative refers to monthly performance of Swiss Re Global Cat Bond Index vs. other indices. Worst month figure refers to the Swiss Re Global Cat Bond Index, which suffered the biggest draw-down over all cat bond indices in September 2022 from Hurricane Ian. Insurance-linked instruments are particularly exposed to sudden substantial or total loss due to natural and/or man-made catastrophes. Diversification cannot ensure profits or protect against loss of principal. Turning back to the strong returns over the past two years, these came on the back of a decline in 2022, of 2.2% - the first negative year in the history of the asset class. This in turn was the result of significant losses in the latter part of the year on the back of a particularly devastating hurricane season in the US. The rebound since then highlights one other facet of the asset class – its recovery from moments of decline, which is often swift and strong, reflects the nature of the reinsurance market that underpins it. In short, when a low-probability but high-severity event happens, reinsurers will face payouts and take immediate – in some cases, significant – losses. In response, and as a core mechanism of the market, reinsurers will reprice the risks they are underwriting, increasing premiums and widening spreads. That re-pricing feeds into the yields offered to the investors in insurance-linked securities that are sold to finance potential payouts. Uncorrelated returns But the potential returns from insurance-linked securities are not the main appeal of the asset class. Yes, performance has been strong – but the fact that these returns are uncorrelated to wider capital markets is the biggest benefit from a portfolio perspective. Put simply, insurance-linked securities are exposed solely to natural, often weather-related, risks. Those risks are unaffected by geopolitical events, economic fluctuations, or shifts in sentiment on capital markets more broadly. That is particularly attractive in the current climate, in which political shifts are driving severe market undulations, especially for listed equities. To show how this has played out historically, catastrophe bonds earned a positive return when the financial world was crashing during the Great Financial Crisis in 2008, while in 2020 the asset class was almost entirely untouched by the Covid-19 pandemic. Even in 2022, the losses were well below those seen on both equities and fixed income markets, which both recorded negative annual returns for the first time in half a century. Annualised return and volatility since January 1997, or inception Past performance is not a guide to future performance and may not be repeated. Source: Schroders, LSEG Datastream, ICE Data Indices, J.P. Morgan, Credit Suisse. Data as at 30 November 2024. All return and volatility figures shown as USD hedged, except EMD Local and MSCI World which are unhedged returns in USD. In the context of fixed income, another notable way that insurance-linked securities are uncorrelated is in relation to duration; that is, the sensitivity to interest rate changes over time. That's because the bulk of the return in the coupon paid to investors is made up of the fixed insurance premium, with only the collateral, money market-based return being floating rate. This in turn means shifts in monetary policy have minimal impact on the yield to investors. Furthermore, risk periods on these securities typically range from six to 36 months, meaning a portfolio will have a blend of short-term durations exposures that are not subject to the longer tail of the yield curve. Insurance-linked securities in a volatile market In a world that has become decidedly more volatile, insurance-linked securities could be an interesting option for investors. Beyond the attractive yield and returns in recent years, their key appeal lies in being uncorrelated to market and geopolitical risks, meaning they represent a potentially valuable source of income diversification and portfolio resilience.
