- New white paper from CAMRADATA –
A leading provider of data and analysis for institutional investors has published its latest white paper, ‘Investment Solutions for Insurers – solutions for a changing landscape’ following a recent roundtable event where insurers, consultants and asset managers discussed which alternatives to traditional asset allocations could deliver good yields in a more challenging investment market.
The discussion focused on the fact insurers want extra returns in fixed income and to lower the sensitivity of their investment portfolios to equity markets.
The panel of guests said that alternatives have already been introduced in a bid to diversify yields including CLOs, long lease commercial real estate, assisted housing for the elderly, Multi-Asset Credit and Alternative Risk Premia strategies.
Sean Thompson, Managing Director, CAMRADATA said, “Insurers are increasingly looking beyond familiar investment strategies to maximise their returns. They recognise the markets have enjoyed bumper returns in recent years from bonds and equities, but now expect lower returns as economies, notably the UK, struggle to grow strongly – they are looking for new solutions.”
The influence of data-modelling in asset allocation
The influence of data-modelling in asset allocation and risk-return scenarios was discussed. Insurers have long relied upon mathematics to build risk profiles for both liabilities and investments. With the increase in computing power, data models can now be fiendishly complex and deliver huge amounts of information reports daily. However, the guests doubted that processing power necessarily makes for better investment portfolio construction or more reliable investment returns.
Daniel Banks, investment consultant with PSolve said, “Some asset managers are proposing strategies with prospective returns calculated to two decimal places, but we need to be very careful with anyone touting that kind of precision. I would rather they gave a range of returns, because altering any input to the model will change expected returns.”
Banks added that words such as ‘optimisation’ should be replaced by ‘robustness’. Chris Price, head of insurance solutions, UK at AXA IM, agreed that techniques such as optimisation are just tools to develop scenarios to which expert judgement then needs to be applied. He quoted one insurance CEO who said, “I would prefer a good underwriter with a pencil than a bad underwriter with a model.”
Ian Coulman, chief investment officer at Pool Re, said, “We occasionally get involved in optimisation. These methodologies’ biggest growth is in second line reviews or sense checks, not recreating the world.”
Scott Eason, investment consultant at Barnett Waddingham, an advisory firm to institutional investors added, “We cannot begin to talk about optimisation because most medium and smaller insurers in the UK are not accessing 99% of the universe of assets. Despite the talk about alternative assets, in the UK 70-80% of providers’ assets are still in gilts, investment grade corporate bonds and equities.”
Record low yields encouraging Insurers to explore alternatives
Pool Re has put 5% of assets to work in a Multi-Asset Credit Strategy, giving the manager freedom to allocate to High Yield, Emerging Market Debt and Loans wherever best value lies. Another 2.5% of assets in the risk portfolio will soon find their way into Alternative Risk Premia mandates. The company is diversifying its mandates, taking some risk from long-only equity. Pool Re still has 60% of assets by value in short-dated corporate bonds and sovereigns, and 20% in index-linked gilts.
AXA IM has offerings which it believes can help UK insurers vary and improve their sources of return, including a fund of long lease UK commercial real estate. The basic advantages are long duration and sensitivity to price rises. A second offering from AXA IM is Collateralised Loan Obligations (CLOs).
PSolve’s Daniel Banks had a different take on analysing new or unusual asset classes and strategies. PSolve’s aim is to understand the drivers behind any investment, instead of taking for granted the claims of any prospecting asset manager about its strategy. This discipline means challenging widely-regarded beliefs in investing, such as the inflation linking power of property.
Banks said, “We looked at the UK property market in aggregate and found that over time its link to inflation was not that strong and in some cases, could even be considered negative.”
What is the outlook for the future?
The guests also discussed the fact that despite geopolitical uncertainty, returns from financial assets had been excellent. While newspaper headlines were full of shocks and revelations, volatility on capital markets has been remarkably low.
The consensus was also that economic growth will continue in the USA and pick up elsewhere. The complex uncertainty of Brexit, however, was expected to stifle the Bank of England’s role, leaving it likely to make just a couple of 0.25% rate rises at most in the next eighteen months.
Finally, Chris Price suggested that Quantitative Easing had reduced spreads significantly. He said, “The question now is what Quantitative Tightening will do”. Central banks’ attempt in 2011 to tighten fiscal stimulus proved premature and damaging across Europe.
Referring to the “new normal”, Ian Coulman said that if all yields have moved down in step, there is no reason to change asset allocation dramatically. He also pointed out that all assets are expensive by historical standards, but insurers should look for alternatives. He added that they will have to accept lower yields across the board and concluded, “A steepening of the yield curve is what insurers really want but I am not sure we are going to get it.”
Sean Thompson, Managing Director, CAMRADATA said, “Our roundtable discussion analysed the best investment solutions for Insurers in today’s changing economic landscape. It makes essential reading for insurers who are looking for alternatives to tackle their investment challenges this year.”
For more information on CAMRADATA visit www.camradata.com
Oil gains as U.S. fuel stocks drop, OPEC+ considers deal rollover
By Stephanie Kelly
NEW YORK (Reuters) – Oil prices rose more than 2% on Wednesday, boosted by a huge drop in U.S. fuel inventories and expectations that OPEC+ producers might decide against increasing output when they meet this week.
U.S. gasoline stocks fell last week by the most on record and refining output fell to a record low in the wake of a deep freeze in Texas that shut production.
Gasoline inventories fell to 243.5 million barrels, the U.S. Energy Information Administration said, while distillate stockpiles fell by the most since 2003 to 143 million barrels.
“This drop is 100% based upon the storm in Texas,” said John Kilduff, partner at Again Capital Markets in New York. “It froze up the entire Texas supply chain and caused a drawdown on available refined product stores.”
Crude inventories rose by 21.6 million barrels, the most on record, to 484.6 million barrels, EIA said. Refining capacity use fell to just 56% of overall capacity, the lowest on record, as the U.S. Gulf Coast’s refining capacity use plunged to 40.9%, the lowest ever.
Brent crude rose $1.30, or 2.1%, to $64.00 a barrel, a 2.1 percent gain by 11:11 a.m. EST (1611 GMT). U.S. West Texas Intermediate (WTI) crude rose $1.55, or 2.6%, to $61.30 a barrel.
Oil prices earlier jumped after Reuters, citing three sources, reported that the OPEC+ group comprising the Organization of the Petroleum Exporting Countries and allies including Russia is considering rolling over production cuts from March into April rather than raising output.
The group had previously been widely expected to ease the production cuts when it meets on Thursday.
Kuwaiti Oil Minister Mohammad al-Fares said the market was being supported by optimism over vaccinations.
Also positive for prices, U.S. President Joe Biden said the United States would have enough COVID-19 vaccines for every American adult by the end of May after Merck & Co agreed to make rival Johnson & Johnson’s inoculation.
Biden said he hoped that the United States would be “back to normal” at this time next year and potentially sooner.
(Reporting by Stephanie Kelly in New York; additional reporting by Bozorgmehr Sharafedin in London and Shu Zhang and Sonali Paul in Singapore; Editing by Edmund Blair and David Goodman)
Stocks edge down as investors hit pause, watch bond yields
By Suzanne Barlyn
NEW YORK (Reuters) – Global equity markets were little changed on Tuesday as Wall Street retreated and investors paused to gauge whether a bond yield jump had run its course, taking stock of gains from Monday’s surge.
The subdued performance of the three major Wall Street indices followed a flat close in Europe and slipping shares in Asia.
“It was such a strong opening to the month yesterday that investors could be short-term focused and saying, ‘Let’s take some of the profits that we saw yesterday,'” said Sam Stovall, chief investment strategist at CFRA Research in New York.
March began with a bang on Monday as global equities markets rose, the S&P 500 had its best day since June 5 and bond markets calmed after a month-long selloff.
In Tuesday late-afternoon trading, the Dow Jones Industrial Average rose 45.37 points, or 0.14%, to 31,580.88, the S&P 500 lost 3.1 points, or 0.08%, to 3,898.72 and the Nasdaq Composite dropped 106.23 points, or 0.78%, to 13,482.60.
The pan-European STOXX 600 index rose 0.19% while MSCI’s gauge of stocks across the globe %.
Emerging market stocks rose 0.05%. MSCI’s broadest index of Asia-Pacific shares outside Japan closed 0.16% lower, while Japan’s Nikkei lost 0.86%.
The European Central Bank should expand bond purchases or even increase the quota earmarked for them if needed to keep yields down, ECB board member Fabio Panetta said on Tuesday, after weeks of steady increases in borrowing costs.
Australia’s central bank on Tuesday affirmed its pledge to keep interest rates at historic lows as policymakers battle to stop surging bond yields from disrupting the country’s surprisingly strong economic recovery.
After a sharp selloff last week, U.S. Treasuries have stabilized with bond market indicators and derivatives positioning pointing to near-term calm. But an improving economy could trigger another slide in their prices.
U.S. Federal Reserve Governor Lael Brainard said she was closely watching bond markets and would be concerned if a recent rise in yields continued and began to constrain economic activity.
“Some of those moves last week and the speed of the moves caught my eye,” Brainard said on Tuesday.
A Treasuries selloff last week pushed the 10-year yield to a one-year high of 1.614%. Benchmark 10-year notes last rose 11/32 in price to yield 1.4102%, from 1.446% late on Monday.
Gold prices rose, inching up from a more than eight-month low, as a retreat in the dollar and U.S. Treasury yields lifted demand for the safe-haven metal.
Spot gold added 0.8% to $1,736.02 an ounce. U.S. gold futures settled up 0.6% at $1,733.60.
The dollar index fell 0.318%, with the euro up 0.37% to $1.2092.
Earlier, the dollar was up for a fourth consecutive day after the spike in bond yields challenged the market consensus for dollar weakness in 2021. But riskier currencies rose as bond markets calmed and stocks recovered.
Bitcoin fell 2.19% to $47,808.00 after rising nearly 7% on Monday.
Shares in mainland China and Hong Kong fell overnight after a top regulatory official expressed concerns about the risk of bubbles bursting in foreign markets.
Oil prices largely shrugged off expectations that OPEC would agree to raise oil supplies at a meeting this week.
The global oil market is rebalancing after damage to demand wrought by the COVID-19 pandemic was met with curbs on output by OPEC producers, the group’s president said.
The industry is recovering from a collapse in demand triggered by the pandemic, but U.S. shale production will not recover to pre-pandemic levels, Occidental Petroleum Chief Executive Vicki Hollub said on Tuesday.
“The recovery is looking really good to us. If you look at what’s happening in India as well as the U.S., I think the oil industry is looking like things will be pretty good for us over next couple of years,” Hollub said.
U.S. crude futures settled down 89 cents at $59.75 a barrel, while Brent futures fell 99 cents to settle at $62.70 a barrel.
(Reporting by Suzanne Barlyn; Editing by Dan Grebler)
Robinhood now a go-to for young investors and short sellers
By John McCrank
NEW YORK (Reuters) – Robinhood, the online brokerage used by many retail traders to pile in to heavily shorted stocks like GameStop Corp, has made an ambitious push into loaning out its clients’ shares to short sellers as it expands its business.
The broker had $1.9 billion in shares loaned out as of Dec. 31, nearly three times the $674 million a year earlier, and it was permitted to lend out $4.6 billion worth of securities under margin agreements, around five times bigger than the prior year, according to an annual regulatory filing late on Monday.
The size of the jump highlights Robinhood’s rapid growth over the past year as the number of retail investors has soared in the work-from-home environment during the pandemic and as retail brokers have largely eliminated trading fees, a model Robinhood helped pioneer.
Menlo Park, California-based Robinhood is expected to go public this year with a valuation of more than $20 billion.
Securities lending is common among brokerages, which can earn income by lending shares to hedge funds and others, who then sell the shares back into the market, betting the share prices will drop so they can buy them back at a lower price when it is time to return them, pocketing the difference.
Shares that are in heavy demand from short sellers, like GameStop, which had 140% short interest in January https://www.reuters.com/article/us-retail-trading-shortselling-explainer/explainer-how-were-more-than-100-of-gamestops-shares-shorted-idUSKBN2AI2DD, command the biggest premium from the lender.
What makes Robinhood notable is that many of the stocks its users invest in are among the most sought-after by people who want to bet against them, said one senior financial executive involved with hedge funds.
It was unclear how great a benefit the securities lending was to Robinhood’s revenue and income, which it does not disclose.
Robinhood declined comment on the filing and did not immediately respond to a request for comment on the details of which stocks it loans out.
In January, retail investors coordinated through trading forums on social media in an attempt to punish hedge funds by buying up shares of GameStop and other heavily shorted names, like AMC Entertainment, driving up their prices and forcing short sellers to close out positions at big losses.
On Jan. 28, at the height of the retail trading mania, Robinhood, along with several other brokers, restricted the buying of GameStop and other so-called meme stocks due to a massive spike in collateral requirements needed to clear the trades, angering many of its customers.
The trading restrictions sparked congressional hearings, regulatory probes and have placed greater scrutiny on short selling.
In response, Vlad Tenev, Robinhood’s chief executive officer, called for shorter stock settlement times, which would reduce clearing collateral requirements.
He also said the idea that more shares of a stock can be shorted than there are available to trade, as was the case with GameStop, is a “pathology” that could destabilize the financial markets.
Robinhood positioned itself for growth in securities lending in October 2018 by launching its own clearing broker, which acts as a go-between with the clearinghouse that settles its trades, and allows it to hold its customers’ assets. The broker can then lend out securities its customers buy on margin.
At present, less than 3% of Robinhood’s funded accounts are margin-enabled, Tenev recently told Congress.
(Reporting by John McCrank in New York; Editing by Megan Davies and Matthew Lewis)
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Oil gains as U.S. fuel stocks drop, OPEC+ considers deal rollover
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