Insurance-linked securities (ILS) investment manager Twelve Capital has adopted a defensive stance in the face of the market volatility caused by the financial market upheaval, although the company believes insurers are much better positioned than banks at this time.
Company-specific issues have arisen, driven by the broader macro-environment of inflation, uncertain growth and rising interest rates, driving volatility in equity and fixed income markets.
There are some concerns around liquidity of banks and insurers, on which Twelve Capital notes, “We believe banks and life-savings insurers to be more exposed to liquidity risk, albeit in most cases liquidity buffers are adequate.”
In addition, the fact Credit Suisse’s AT1 bonds are facing losses imposed by the regulator means regulatory risk has to be reassessed, Ramseier explains, while there is also a spill-over risk for insurers RT1 bonds, he believes.
Overall, he believes insurers are better positioned than banks, but notes that, “In both sub-sectors there are defensive names and structures that are well positioned to show resilience in the current markets.
“Albeit cautious, buying opportunities could also arise,” Ramseier states.
As a result of the volatility, Twelve Capital is adjusting its investing focus, to be more defensive and protect portfolios, while taking opportunities that emerge amid the market volatility for its investors.
“Twelve Capital implements a defensive approach as mid-term uncertainty is likely to persist,” Ramseier explains.
Adding that, “Twelve Capital’s focus during this period of market uncertainty is to position the portfolios it manages in a defensive way. We currently prefer insurers to banks, while we believe that in both sub-sectors there are defensive names and bond structures that are well positioned to show resilience in the current market volatility. Moreover, albeit cautious, buying opportunities could arise.”
Ramseier continued to explain, “In this context, Twelve Capital’s focus on strong fundamental analysis on each issuer and instrument together with a selective investment approach are key.
“Overall, in the fixed income space we favour dated Tier 2 bonds that have limited going concern loss- (contrary to A T1 and RT1). We also favour instruments issued by large and well diversified multi-line insurers with solid investment grade credit ratings.
“In our equity portfolios our top-down conclusion on banks is to stay on the side lines with an underweight positioning relative to insurance and diversified fee-based financials.”