guiding-captives
1 January 1970Asset management analysis

Guiding captives through a complex world


In today’s troubled investment environment, how can captives seek to eke out additional returns?

The difficult environment since 2008 will probably continue for the short to medium term. When one looks at the 2008 credit crisis and asks how long does it take to truly recover from such an event, it may be a decade—which would echo the recovery time taken following the Great Depression. There has been good deleveraging at the corporate and individual levels, but now it is needed at the government level. If one looks at US companies, most have worked out how to make money in this environment. Many global companies have done the same but it is regional. Looking at corporate balance sheets, they look fairly strong. Consumers are still somewhat stretched, but they are moving in the right direction. Governments, however, have taken all that deleveraging and piled that on their own balance sheets.

Most developed countries have unsustainable debt levels that need to come down. Unfortunately, if one looks at Europe, for example, because of the way the euro was created, it is impossible for them to delever within that construct. With the type of austerity programmes in action and with an impending government deleveraging there is no way that global growth can be above trend.

For investors, meeting the level of inflation associated with their business becomes critical. Most captives have an anchor portion of their portfolio that is in traditional investment grade fixed income and it is used to pay the bills of the captive and provide safety to the balance sheet. If your captive can’t achieve a return from the anchor portion that is at, or above, the rate of inflation, then you are losing ground.

From Performa’s perspective, one of the biggest things we are trying to do is find investment grade fixed income assets that offer slightly higher return, with little or no additional risk. One of the ways we do that is by concentrating on corporate bonds—especially US-centric.

The other way is to diversify into other investment grade asset classes such as the commercial mortgage market and the consumer portion of the asset-backed market.

It also means avoiding those sectors of the market that are overvalued for reasons beyond investment parameters: government bonds primarily and the traditional mortgage market. Both those sectors are being manipulated by the central banks. Being the anchor part of the portfolio, the fixed income side of the portfolio can be fraught with danger as it relates to interest rate risk.

When looking at the rest of the portfolio, it depends on the captive and its surplus. For those with a good bit of surplus and equity exposure, then our feeling is that over the five-year timeframe, equities will do well, because, as we said earlier, companies have learned how change their models to make money in a tougher environment. The issue with equities is that the hard work that equity managers do in finding undervalued stocks is really being drowned out. Over the last four years, the market has been dictated to by a macro oriented risk-on, risk-off mentality and not fundamental investing.

"Over the last six months we have partially moved clients out of traditional long-only and market-neutral equities, in favour of high-yield."

Managers who focus on fundamentals have had difficulty outperforming benchmarks for the past few years, because their style isn’t in favour. As we go through sovereign deleveraging, people will start to focus more on fundamentals and sticking with one’s manager will be vital. We are telling our clients, now is not the time to change equity managers or investment styles. Switching to a momentum manager could be very costly. When the music stops on the macro wheel, it won’t be very pretty. Yes, it is a difficult environment, but as long as equity managers focus on what they have done best over the long term, then outperformance will come back, even if clients are asking ‘why isn’t my investment manager doing better?’ at present.

We are also looking to combat asset volatility through asset allocation. Over the last six months we have partially moved clients out of traditional long-only and market-neutral equities, in favour of high-yield. Clients have moved approximately 15 to 20 percent of their portfolios, limiting their volatility as it relates to the equity market and also providing an excess return capability by giving them a current yield.

It comes down to where can you find assets that provide you with some kind of dividend or yield cushion to combat the level of volatility in the markets and the potential that increasing interest rates will eat away at your investment-grade bond positions.

Can you tell us a little more about your move into the US?

Performa has worked with offshore captives for more than 20 years now—particularly in Bermuda and Grand Cayman—but as of July, we have entered the US market. The firm is well known in the captive space and captive manager community. We have had previous requests to handle US business but were unable to do so until now.

Our style of investment and portfolio management will remain the same managing the investment-grade fixed income portfolios inhouse and having partners assist us in our asset allocation structure. We believe the bulk of the captives in the US are after a more fixed income oriented approach and that ties in well with our capital preservation philosophy.

Performa has worked with offshore captives for more than 20 years now—particularly in Bermuda and Grand Cayman—but as of July, we have entered the US market. The firm is well known in the captive space and captive manager community. We have had previous requests to handle US business but were unable to do so until now.

Our style of investment and portfolio management will remain the same managing the investment-grade fixed income portfolios inhouse and having partners assist us in our asset allocation structure. We believe the bulk of the captives in the US are after a more fixed income oriented approach and that ties in well with our capital preservation philosophy.

We are also looking to provide a solution for smaller captives and draw them together under one investment umbrella in order to take advantage of economies of scale. We think those captives are underserved by the market and an exciting segment. As we do in other markets, we will provide separate accounts for the larger US clients.

How is Performa expanding its team in the US?

We brought in Derek Martisus to run our client service and solutions group for US-based captives. He has extensive experience working with captives in the state as he had previously been with Dwight Asset Management and Marsh Captive Services. Since Performa’s US operations are based in Charleston, we realised we also needed a presence in Vermont.

We are also expanding our investment team and have hired credit analysts and portfolio managers to serve our global client base. As we continue to expand our investment engine, we will have a combination of hires at our Charleston and Vermont offices, so we will have investment professionals in both locations. Our intention through the rest of this year is to add several more investment professionals. What will really differentiate Performa is that in at least two US captive domiciles we can provide institutional investment management with a local presence. We think that will resonate well within the Vermont and South Carolina captive communities.