Hugh Barit, chairman and CEO of Performa, Zafrin Nurmohamed, senior portfolio manager at Butterfield, Scott Renninger, chief investment officer at Captive Resources, Dario Mazzarello, head of institutional management at Jarislowsky Fraser
6 December 2019

Captives should be realistic in their investment expectations, say fund managers

Captives should manage their expectations and not expect investment managers to always deliver sky-high, double digit returns, according to Hugh Barit, chairman and CEO of Performa.

Barit was speaking at the Cayman Captive Forum, on a panel entitled Navigating in Turbulent Times: How Should Captives View Markets, Risk and Sources of Return?

He said: “This is not Las Vegas. Capital preservation has to be the number one goal for captives. The second goal is liquidity for claims. If you can meet goals one and two, then great returns is goal number three.”

Any captive thinking 15 percent returns are achievable over a ten year period was fooling themselves, Barit warned. “There is nothing wrong with mid single digit returns for a captive,” he said.

Zafrin Nurmohamed, senior portfolio manager at Butterfield, agreed, adding that captives should be primarily concerned with ensuring their assets outperformed their liabilities. “Now is not a good time to be taking excessive risk,” he warned.

Nurmohamed admitted it is harder for active managers to make their case in markets like the ones that have prevailed in recent years, when central bank stimulus has boosted both bonds and equities. In such markets index tracking funds, which charge a fraction of the fees active managers do, deliver excellent returns, he admitted.

However, he said: “Some time the tide will turn and the value of active managers will be more obvious.”

Meanwhile Scott Renninger, chief investment officer at Captive Resources, disputed that passive investing even exists. “There is no such thing as passive investing,” he said. “There is index investing, but it is always an active choice which index you want to invest in.”

Active managers add value in many ways, the panel argued, not least by preserving capital in bear markets. While ETFs are cheap and ensure investors do not underperform the market, they can be poorly valued because they contain overpriced stocks, such as technology companies that may be priced at around 80x earnings, said Dario Mazzarello, head of institutional management at Jarislowsky Fraser. By taking a more selective approach to stock picking, active managers can deliver alpha, he said.

Active managers are also well placed to capitalise on the sharp swings between pessimism and optimism that characterise the modern global economy, said Nurmohamed, where markets are pushed and pulled in different directions by the constantly evolving news cycle.

John Stoltzfus, chief investment strategist at Oppenheimer, said: “Digital news means we are always worried. We are always looking for the next black swan.”

Stoltzfus argued fundamental changes to the global economy brought about by technology and globalisation are poorly understood, and represent long term, counter-inflationary forces on the prices of assets, labour and commodities. “We may not be in a late cycle stage at all, we may be right in the middle of a long term cycle,” he said. If a trade deal between the US and China materialises, many economists will do a 180 degree turn and become markedly more optimistic, he predicted.

Stoltzfus pointed to the steady and relentless decline in yields over a range of timescales to demonstrate fundamental and long term changes to the structure of the economy. “Growth worldwide is increasingly diffused,” he said.