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Roundtables & Panels

CAMRADATA: Insurance Roundtable

The benchmark is cash
The CAMRADATA panel were then asked whether Absolute Return strategies and benchmarks can be helpful in the current environment. Pistarino said that Foresters has an Absolute Return benchmark expressed through a Strategic Asset Allocation. He explained that there the portfolio manager has a tactical risk budget to express short-term views. “We are targeting different levels of return in each portfolio depending on the specific risk appetite,” he said.

Amer said that MS Amlin has exposure to Absolute Return strategies, with £2 billion in its own UCITS vehicle, the Blue Fund. He said there were different approaches, with varying cash + targets. But so far this year, the Blue Fund has managed only -1.6%, with one underlying strategy performing less well due to duration positions. “The performance of the Blue Fund has been disappointing – it should be doing more,” Amer said.

“You have to be very specific about what you want them to do and what you expect them to do.”

At the same time, he noted that heightened volatility tended to shorten clients’ time horizons. They are now looking month-to-month, whereas the focus should remain on the excellent track record over the medium and long term. (Wilgar chipped in that since joining the investment team of an insurer during a bear market, colleagues from parts of the firm unrelated to investments asked regularly what he’d lost them).

Jenkins said there was hidden beta in most Absolute Return Bond strategies. “If you focus purely on completely avoiding beta, it is a challenge to really generate a cash-plus return on a consistent basis,” he explained. “It is very hard to do year in, year out.”

King said that CTIM had a volatility arbitrage manager that had made no money this year in spite of the abundance of ups and downs in markets. “It is a very granular trading technique; they have just been in the wrong parts of the market,” he explained. “You have to be very specific about what you want them to do and what you expect them to do.”

Amer had no complaints about the transparency or monitoring of MS Amlin’s Absolute Return strategies. “We are much more active in terms of keeping tabs on what underlying managers are doing on behalf of the insurer,” he said. “We see their positions when they are dealing; we see the risks they are running. You need this transparency in order to know whether or not they are pursuing diversification.

“We want the managers to make money in every possible market but no one is good enough to do that consistently. So what we are monitoring is whether something has materially changed. Have they got wedded to a particular idea or chasing losses?”

InsuranceOne source of disgruntlement for both Amer and Jenkins was the treatment by Solvency II of certain securitised products that each felt could boost diversification. For Jenkins, it was Collateralised Loan Obligations (CLOs). For Amer, it was Mortgage-Backed Securities (MBSs).

“Payden & Rygel makes widespread use of securitised products, some of which for regulatory reasons cannot be used economically in Europe and the UK for insurers,” he said. Jenkins argued that their absolute return strategy gave competitive advantage in an ongoing form, unlike quicksilver alpha opportunities from some Absolute Return strategies.

“The more liquid the component, the greater the challenge to come up with alpha year after year,” he warned.

Amer noted that MBS held in the portfolio are backed by Ginnie Mae, a Federal agency, but because of hangovers from the Global Financial Crisis, UK insurers are penalised for holding it.