Rethinking Core Fixed Income in an Era of Negative Real Yields
On 13 April 2021, twenty-five Chief Investment Officers (CIOs) from the global insurance industry gathered virtually to debate one of the key challenges for insurance portfolios today: core fixed income in a negative yield environment.
As the world attempts to steer a path out of the COVID-19 pandemic and vaccination programmes scale up, there is now a little light at the end of the tunnel. As highlighted in our roundtable discussions, fragility and uncertainty remain, particularly given the resurgence of cases in several countries and the continued rise in infections and deaths globally.
Speakers in our session illustrated that financial markets have followed in tow, reaching new highs as they look ahead to recovery but also encountering more volatility as worries about new waves, future inflation and the long-term impact on economies occasionally resurface. This has created a feedback loop with policymakers, who have resorted to increasing amounts of stimulus to cushion societies and economies through these fragile times, spending over USD 20 trillion at last count across monetary and fiscal support programmes. The result has been a crowding out of asset risk and a steep reduction in yields (or equivalently, risk premia), as markets acquiesce to the significant and continuing firepower being brought to the table by policymakers.
Participants in the CIO Roundtable 2021
CIO participants discussed the unique challenges for insurers and their portfolios, notably for core fixed income. Though it is the foundation and mainstay of the insurance portfolio, in the current environment, low or even negative yields make core fixed income uneconomic for many insurers. Even where returns are positive, they are often disappointing.
Raising portfolio yields is a growing priority, the roundtable highlighted, but this must happen in a careful, risk-adjusted way to avoid impacting balance sheet and earnings volatility, not to mention the credit rating. Risk appetite is an increasingly important question, as insurers find themselves being influenced by external macro environmental factors on the one hand, while having to remain cognizant of rising tail risks on the other.
Participants noted that the response from insurers has been diverse. Moving down the credit curve and into different geographies, the inclusion of private assets and infrastructure in insurance portfolios and the use of equity-like strategies are all becoming more common. ESG investments also offer new opportunities to address important issues like climate change and social inequalities, whilst offering tangible added returns to the portfolio.
It is clear that the face of insurance investment is evolving rapidly in light of new challenges. This is a theme we will explore further at our annual CIO Conference in October 2021.
