A solution for insurers to the investment grade fixed income dilemma

We examine emerging market investment grade corporate debt as a compelling high-grade solution to Insurers’ low returns dilemma. This diverse and growing asset class offers higher yields, lower duration and less leverage that US investment grade.

Nov 19, 2020

10 minutes

Victoria Harling
Alan Siow
We examine emerging market investment grade corporate debt as a compelling high-grade solution to Insurers’ low returns dilemma. This diverse and growing asset class offers higher yields, lower duration and less leverage that US investment grade.

The recent COVID-19 induced market shock has changed the structural landscape for many fixed income investors. Portfolios were perhaps not as stable as hoped and given the continued unprecedented monetary policy, traditional portfolio linchpins (USTs and US Corporate Credit) no longer provide sufficient yield/income. This has left many investors scratching their heads, asking how to achieve their intended return target without taking on significantly more risk. Many other members of the investment community have turned to lower credit quality or illiquid asset classes to combat this, while maintaining a healthy overall exposure to investment grade1. Within insurance, lower credit quality is less palatable given the increases in RBC charges.

We believe there is another alternative: emerging market investment grade corporate debt.

This paper outlines why we believe this fast growing and increasingly diverse US$1.4 trillion asset class, which has higher yields, lower duration, and less leverage than US investment grade, with importantly the same RBC charge, could provide a high-grade complementary antidote to the low return dilemma.

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1As defined by the Bloomberg Barclays US Credit Index.

General risks:

All investments carry the risk of capital loss. The value of investments, and any income generated from them, can fall as well as rise and will be affected by changes in interest rates, currency fluctuations, general market conditions and other political, social and economic developments, as well as by specific matters relating to the assets in which the investment strategy invests. If any currency differs from the investor’s home currency, returns may increase or decrease as a result of currency fluctuations. Past performance is not a reliable indicator of future results.
Victoria Harling
Portfolio Manager
Alan Siow
Portfolio Manager

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