Insurers plan further shift away from bonds, says study

The majority of insurers intends to back away from the low-yielding bond market and head into less liquid assets, as a burst of inflation since the outbreak of Covid-19 builds on longer-term pressures, according to a survey.

The study by investment consultancy bfinance found that 61 per cent of insurers intended to cut fixed-income allocations over the next year-and-a-half, while the same proportion planned to boost exposure to “unfamiliar” assets including emerging-market debt, private debt, private equity and infrastructure. The survey covers 90 insurers with more than $5tn in combined assets under management.

The shift away from low-yielding public debt and into more specialised and generally more opaque markets highlights the inflationary pressure long-term investors are facing while consumer prices are rising at their fastest pace in the US in almost 40 years.

“The rise in investment diversification . . . is not a pandemic story, in that the low-yield decade that followed the [2008 financial crisis] has placed all traditionally conservative investors under growing pressure,” said Kathryn Saklatvala, who co-authored the report. “Yet the pandemic and its impact on inflation, rates and systemic risk have produced a distinct change in the pace . . . speeding up the shifts towards new asset classes and portfolio illiquidity.”

Around the world, $10tn of debt carries a negative yield, with prices so high and regular interest payments so low that buyers are guaranteed a loss if they hold the debt to maturity. Already, 55 per cent of the survey respondents said they had cut fixed-income exposure during the pandemic period.

Hedge fund Bridgewater’s chief executive officer Ray Dalio is among the well-known investors to have made the case for avoiding bonds recently. “[Central banks’] printing of money and buying of debt assets has driven interest rates so low that cash and bonds are stupid to own,” he wrote in a LinkedIn post this January.

The tally of negative-yielding debt has shrunk in recent weeks, reaching the lowest point since April 2020, as central banks prepare to scale back asset-buying schemes and push up interest rates, unpicking the economic support they provided when the pandemic first struck and denting bond prices in the process.

Still, yields remain low, posing a challenge to often long-term investors such as insurers and pension funds, which must look elsewhere for returns. The survey said slightly more than half of insurers now invest in infrastructure equity, up from 36 per cent in March 2020. The figure is expected to rise further from here, with a similar pattern also in emerging market debt.

Core government bond markets are very low yielding, but they provide smooth liquidity; it is easy for investors to hop in and out of the market and to find buyers or sellers of the assets they want at will. That liquidity is not always available in private markets and infrastructure.

The survey suggests that 74 per cent of insurers expect their portfolios to become less liquid over the next 18 months. Some fear that in the event of a market shock in future, that may force more selling into more liquid public markets. “Such behaviour may become a liquidity drag for public equities and cause future market corrections to be even more severe,” said Tancredi Cordero, chief executive and founder of investment advisory boutique Kuros Associates.

Alban de Mailly Nesle, group chief financial officer of Axa, said the insurer had in 2018 set a target to allocate 25 per cent of its portfolio to alternatives by 2023. “They provide much higher profitability in a low credit spread context, and strong resilience to challenging economic contexts and crisis compared to other asset classes,” he said, adding that this was particularly true of private equity.

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