Aside from the huge impact to global health, the COVID-19 pandemic has triggered a major economic and financial crisis, affecting how investors are allocating capital. Insurers, which rely on investment as a major stream of income, have felt this distress.
According to Matthew O’Sullivan (pictured), head of APAC origination at M&G Investment, early in the crisis, investors took stock of how their portfolios were reacting to the downturn, especially in public markets. Meanwhile, investors, who were defensively positioned, were able to selectively invest in deeply discounted public investments.
As the economy began to recover, investors started to allocate for alternative and private investments again. These investments, O’Sullivan said, provide good relative value, diversity and can also provide defensive cashflows for the investors.
“However, rather than trying to guess future paths, investors, especially in the insurance industry should ensure they are adequately prepared for whatever happens,” he said. “Being well-placed to take advantage of any opportunities that arise from different global risks – and taking a defensive stance where necessary – is key.”
The importance of diversification
The crisis, O’Sullivan said, has highlighted the benefit of having a diversified investment portfolio, which includes alternative and private assets.
“Pension funds, insurers and other institutional investors across Asia have been looking at alternative and private assets to provide enhanced yields in a low yield environment,” he said. “However, post the COVID-19 financial crisis, this is shifting to include focusing even more toward the diversity and robust cashflows that these investments can provide.”
But, he pointed out that investing in private assets extends far beyond mid-market corporate direct lending. There is a huge number of different sub-asset classes, and for many institutions it is about combining these assets to achieve very specific objectives.
“Within private debt, for example, there is a variety of strategies to target different outcomes – including leveraged loans, commercial mortgage debt, infrastructure debt and structured credit,” O’Sullivan said.
Many insurers, he said, now recognise that alternative and private market assets can help them achieve objectives that public markets cannot. Infrastructure and structured credit are sectors where investors can get access to diversification and investments with strong defensive structures.
Infrastructure investments are gaining popularity, especially in emerging markets in Asia and other regions. This is because investments in infrastructure debt are typically well-protected from adverse events due to strong covenants, negotiated as part of the financing agreement, and security over infrastructure assets, O’Sullivan said.
“The defensive and lower volatility nature of the asset class has become more widely acknowledged by investors looking for alternatives to publicly-traded securities – the values of which can rise or fall frequently as market perceptions shift,” he said. “An insurance company looking for inflation-linked income and secure, reliable cashflows might consider allocating or increasing their exposure to this asset class.”
Meanwhile, structured credit provides investors with access to a variety of different asset types, such as mortgages, auto loans, other consumer products, SMEs, commercial mortgages, and leveraged finance. According to O’Sullivan, the nature of the transactions allows investors to invest in senior positions, which have many structural protections, and therefore receive high ratings from rating agencies. However, investors must be mindful of the complex structures – as this complexity does add a premium to the investments. If an investor does not fully understand the structure, then they might find its performance to be quite different from what they expect.
Moving forward, O’Sullivan predicts that investors will focus on ensuring their portfolios are adequately diversified, as well as having enough resilience to better perform through future downturns. This means allocation to a number of different asset classes, in order reduce correlation across their portfolio.
“Ultimately, as with every aspect of investing, the decision to allocate to alternative and private market assets requires a thorough evaluation of both benefits and risks,” he said. “Institutional investors planning to boost their exposure to non-traditional asset classes should choose managers that can seek opportunities across the entire market, and this sometimes means looking in less competed and emerging areas.”