Insurance-linked securities a top choice in private assets: Schroders

According to Schroders survey data, insurance-linked securities (ILS) are considered one of the best choices for investors looking to diversify and add performance to their portfolios, in the category of investments in private assets.

logo-schrodersWith some 41% of investors surveyed saying private assets are now even more attractive, given the diversification benefits they offer, this suggests the ILS asset class will remain a popular choice of alternative investments.

The Schroders Global Investor Study 2023 reveals that investors around the world need to reevaluate their investment strategies, in response to “the new economic reality, current inflation and geopolitical uncertainty.”

More than 23,000 people investing in 33 locations around the world were surveyed in the study this year and Schroders said the study found that almost 80% of investors believe that “we have entered into a new era of policy and market behavior due to higher inflation.” and interest rates.

This new reality determines investor preferences and allocations and private assets, as well as alternative investment classes, benefit.

But true diversification can be hard to come by, which, in a year where insurance-linked securities (ILS) such as catastrophe bonds are generating record returns, makes the ILS asset class a unique opportunity.

54% of respondents in the Schroders study said the new macroeconomic and political environment is pushing them to adjust their investment strategies, while 34% said they have not yet changed it, but that they intended to do so.

Increasingly, so-called private assets are seen as an essential tool for diversification and, as these assets become increasingly democratized and often more accessible, they appear to be becoming a priority for many.

41% of respondents believe that private assets have now become more attractive, while 46% believe that funds managed by a specialist fund manager are more attractive in the new environment.

Higher returns are also expected, with the cost of capital now high and asset classes expected to demonstrate a higher return than risk-free.

Johanna Kyrklund, Schroders Group CIO and Co-Head of Investments, commented: “In an investment landscape increasingly shaped by the ‘3Ds’ of deglobalization, decarbonization and demographics, investors are are still getting used to the fact that higher inflation and higher interest rates are here to stay. Every asset had to be revalued to compete with the return on cash in the bank. Valuation matters once again. Compared to the last 15 years, you may now need to be more flexible and active in the way you invest. The study results show that some investors adapt more quickly than others.

Investors nevertheless perceive relatively high barriers to entry with private assets, because even if they become more widely available, they are still not the easiest to access.

Less transparency, less liquidity and longer lock-up periods have been cited as barriers to investing in private asset classes.

However, on average, investors said they would consider allocating up to 16.4% of their funds to private assets, while more sophisticated investors said it could be as high as 23.1%.

While 8% of investors surveyed said that if they could, they would choose to invest in insurance-related securities (ILS).

51% of respondents said private assets can help increase portfolio diversification and 56% said they can help drive higher returns, perhaps explaining their great appeal.

Meanwhile, 40% of investors highlighted sustainability reasons as a reason to be attracted to private asset classes.

Nils Rode, chief investment officer of Schroders Capital, said: “A few years ago, a typical investor in private assets would have been what asset managers call ‘institutional’. These are large investors like defined benefit pension plans or large endowment funds. As this year’s GIS shows, the situation is likely to change significantly in the coming years.

“The range of options for accessing private markets is expanding and small investors are taking note. This is a difficult time to interpret the markets, and investors are seeking every tool available to achieve their desired results. Private assets represent an incredibly diverse set of opportunities and a large number of return drivers.

“We believe that expanding options for small investors is a very positive development. We also believe that the case for including private asset allocation – where appropriate – is arguably stronger than ever.

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