Captives could take bigger risks

Captives should take on more investment risks instead of favouring market ‘safe havens’ and focusing on capital preservation.

That is according to wealth manager London & Capital, which recently published its first edition of London & Capital Captive Indices.

The wealth manager explained that by focusing on ‘safe havens’, captives are not considering the magnitude of potential reward that this precludes.

It added that the more investment risk a captive takes on, the greater the potential returns over two to three year periods, even allowing for instances of market stress.

The wealth manager mapped annualised volatility against annualised returns for four asset classes: cash, US aggregate IG bonds, US high yield bonds and US equities, and found that returns exceeded volatility in each case.

“Captives’ liquidity needs mean they are likely to be constrained to the lower end of the risk spectrum represented on the previous page. However, the London& Capital Captive Indices indicate that adding even a small degree of additional risk can be rewarding,” said the wealth manager.

However, the wealth manager added that achieving the optimal balance of risk and return requires an in-depth analysis of the risks each asset class represents, and the correlation between them through market cycles.

London & Capital said: “Following the Indices may help captives achieve the right combination of assets in their portfolios so that an optimal balance of risk and return is more likely.”