27 October 2014Asset management analysis

London & Capital releases updated captive indices

Wealth manager London & Capital has updated its captive indices to reflect the third quarter of 2014.

The indices examine the long-term trend of three typical asset allocations across a ten-year cycle, allowing captive insurers to have a point of reference to benchmark the performance of their investment strategies.

“The watchword for global economic activity in the third quarter of 2014 was ‘divergence’” said the wealth manager. “The US continued to bounce back from its winter-induced slowdown earlier in the year, with unemployment falling further and business investment picking up. The quarter was capped-off with an upward revision of GDP for Q2 from 4.2 percent to 4.6 percent(annualised).

“The Eurozone, on the other hand, after showing some signs of life at the beginning of the year, is slowing down again, partly as a result of geopolitical tensions in Ukraine, denting business sentiment.”

It added that strong economic data in the US sparked renewed speculation that the Federal Reserve might start to raise interest rates sooner than expected. This affected shorter dated high grade bonds in particular, because of their sensitivity to policy change.

According to London & Capital, longer dated high grade bonds finished the quarter in positive territory as they are influenced more by inflationary expectations which were kept in check by stable prices. Elsewhere in the fixed income markets, high yield bonds were negatively affected by profit taking.

Captive Index 1, the index for captive insurers with a high frequency, low severity claims pattern, pursuing a conservative investment strategy, was flat in the quarter, as shorter dated high grade bonds came under pressure.

Captive Index 2, for captive insurers with less immediate cash-flow requirements for claims, and which are pursuing a balanced investment strategy, was slightly down as it was affected more by a fall in high yield bonds.

Captive Index 3, for captive insurers that can withstand short-term market volatility, as they are looking to fund long-term liabilities, posted a positive return in the quarter as it benefited from the allocation to longer dated high grade bonds and a greater exposure to equities.