Insurance Insights Q2 2024: Strategic Asset Allocations using multi-alternatives
Jaijit Kumar, Invesco’s Head of Asia Insurance Solutions shares his Q2 2024 review of Strategic Asset Allocations (SAAs) using multi-alternatives.
Invesco Insurance Insights
This newsletter brings the latest topics impacting insurers, aimed to help those managing investment portfolios while considering an insurer’s business, regulatory and solvency needs.
Welcome
In earlier editions of our Insurance Insights newsletter for 2024, we took more of a top-down approach to asset class selection. For Q3, we’ll switch gears and consider a bottom-up approach. We analyze insurers’ exposure to broad fixed income - at a security level - and look at ways to potentially optimize this exposure (yields remain attractive and this may be an opportune time to lock in some of these levels).
In earlier editions of our Insurance Insights newsletter for 2024, we took more of a top-down approach. We stressed the importance of reviewing strategic asset allocations on a regular basis and assessing how new asset classes can enhance the overall profile of insurer’s portfolios. We then went a bit deeper and looked at the use of multi-alternatives to further optimize these portfolios.
For this edition, we’ll switch gears and consider a bottom-up approach. We analyze insurers’ exposure to broad fixed income - at a security level - and look at ways to potentially optimize this exposure (yields still generally remain attractive and this may be an opportune time to lock in some of these levels). We use our powerful in-house portfolio analytics system, Vision, to run the analysis. The first step is to determine an appropriate universe from which to select securities, then we go through a series of screens, establish some constraints for the portfolio, and finally select which portfolio parameters to maximize. The content while illustration-heavy conveys the types of analysis that can be carried out. Such a process is best explained via an interactive demo – and we would be happy to arrange such a session with you.
We hope that this topic and observations will help you in your discussions on the assessment, construction, and management of portfolios in this constantly evolving environment.
As always, please do not hesitate to reach out to us – your thoughts on these topics are much appreciated.
Jaijit Kumar, Head of Asia Insurance Solutions
Invesco Insurance Insights 3rd edition 2024
Invesco Insurance Insights 3rd edition 2024
In this edition, we will look at exposures to broad public fixed income at a security level and assess ways to potentially optimize this exposure. We use our in-house portfolio analytics system “ Vision” and we progressively go through the main steps involved.
Quick take: Invesco Insurance Insights 3rd edition 2024
Transcript
Hello everyone, in this 3rd edition of our Insurance Insights newsletter of the year, we thought we’d complement what we’ve discussed in the prior two editions, which was more of a top-down perspective with a bottom-up approach this time around.
We’ll look at exposures to broad public fixed income at a security level and assess ways to potentially optimize this exposure, certainly relevant today given yields are at quite attractive levels. We use our in-house portfolio analytics system, called Vision, and we progressively go through the main steps involved selecting a universe, screening, putting in constraints, and finally selecting which portfolio parameter to optimize.
In the case study that we’ve outlined here, we start with a broad investment grade USD-denominated debt universe. Using our Vision portfolio system, we can customize such a portfolio by incorporating a large number of screens and constraints. These can range from being fairly broad, for example a ratings screen, excluding certain countries or regions depending on the insurer’s requirements to very granular, for example, excluding certain issuers or issues, excluding sub debt, hybrids, perpetuals, restricting how much to allocate to various maturity buckets, sub-sector limits to name a few.
We then introduce constraints, for example around ESG, setting maximum carbon intensity levels or setting a maximum warming potential. We can also set credit spread charge limits. Then, we can select to optimize certain parameters, for example, the yield to worst. And this then results in a portfolio of specified bonds meeting the criterial laid out in the previous steps.
This list of bonds can then be used as a basis for constructing an actual portfolio by running these through a robust credit analysis process. We’re able to visualize key parameters of such a portfolio, for example, the cash flow profile, the ratings exposures, geographical and sector allocations, and so on.
We’ve also looked at the impact of expanding the initial universe to see if we can gain any efficiencies through such a process, and this is where the customization element, again, comes into focus. The system allows for this to be a rapid iterative process so that several scenarios can be run fairly quickly which can result in a more optimal portfolio.
The aim here is to illustrate that we can look for efficiencies at all levels of an insurer’s asset allocation and this is indeed something that we believe should be assessed on a regular basis.
We hope that this will help you in your on-going management of portfolios in this constantly changing environment, and we look forward to any comments or suggestions that you may have.
Thank you.
Insurance investment insights
Insurance Insights
Optimizing fixed income portfolios
In this case study, Jaijit Kumar, Head of Asia Insurance Solutions assesses insurers’ exposure to broad investment-grade USD-denominated debt and showcases how to optimize this using a bottom-up portfolio construction process.
Previous editions
Insurance Insights Q1 2024 : SAA review using updated capital market assumptions
Jaijit Kumar, Invesco’s Head of Asia Insurance Solutions shares his Q1 2024 SAA review using updated capital market assumptions.
Insurance Insights Q4 2023: Enhancing insurance portfolio allocations
Jaijit Kumar, Invesco’s Head of Asia Insurance Solutions shares his Q4 analysis on enhancing insurance portfolio allocations.
The macro outlook and implications for asset allocation
Insurance Insights
Macro conditions ripe for fixed income
David Chao, Global Market Strategist, Asia Pacific (ex-Japan) shares his macro outlook for the upcoming quarter. He remains confident that his base case scenario will play out - a relatively soft landing despite slowing US growth. Amid these macro conditions he expects fixed income, particularly in the US, to outperform.
Fixed Income - Reframe Income Potential
Invesco fixed income capabilities are designed to capture market potential. Explore active fixed income approaches.
Global debt mid-year outlook
We are seeing improving global growth conditions, led by emerging market countries, such as India, and supported by resilient US growth. We expect global growth to broaden over time, as Europe recovers from a very weak year, dragged down by Germany.
2024 Long-Term Capital Market Assumptions
Invesco Solutions is proud to present our 2024 Capital Market Assumptions (CMAs). We hope the insights and data presented in this publication assist in your asset allocation process as you begin to rebalance portfolios in the coming months.
Footnotes
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Investment risks
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested. Diversification and asset allocation do not guarantee a profit or eliminate the risk of loss.
Invesco Solutions (IS) develops Capital Market Assumptions (CMAs) that provide long-term estimates for the behavior of major asset classes globally. The team is dedicated to designing outcome-oriented, multi-asset portfolios that meet the specific goals of investors. The assumptions, which are based on 5- and 10-year investment time horizon, are intended to guide these strategic asset class allocations. For each selected asset class, IS develop assumptions for estimated return, estimated standard deviation of return (volatility), and estimated correlation with other asset classes. Estimated returns are subject to uncertainty and error and can be conditional on economic scenarios. In the event a particular scenario comes to pass, actual returns could be significantly higher or lower than these estimates.
Vision
Invesco Vision is a decision support system that combines analytical and diagnostic capabilities to foster better portfolio management decision-making. Invesco Vision incorporates CMAs, proprietary risk forecasts, and robust optimization techniques to help guide our portfolio construction and rebalancing processes. By helping investors and researchers better understand portfolio risks and trade-offs, it helps to identify potential solutions best aligned with their specific preferences and objectives.
The Invesco Vision tool can be used in practice to develop solutions across a range of challenges encountered in the marketplace. The analysis output and insights shown in the document does not take into account any individual investor’s investment objectives, financial situation or particular needs. The insights are not intended as a recommendation to invest in a specific asset class or strategy, or as a promise of future performance. For additional information on our methodology, please refer to our CMA and Invesco Vision papers.
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