Why defensive strategies ?
Benefits of investing in defensive strategies :
- Leverage on sources of yield not naturally available with low risk.
- Mitigate the impact of market volatility.
- Diversify portfolios while controlling risks and capital costs.
- Implement fully transparent solutions.
- Optimise return on Allocated Capital (e.g. regulatory capital, economic capital and rating agency).
Typical investment process
See below how an equity investment process can be built to transform a pure directional risk into a yield-orientated investment.
In equities for example, a core portfolio of stocks selected based on fundamentals is complemented by the sale of short-dated call options (enhancing the yield and reducing the volatility) and by the purchase of long-dated put options aiming to improve the risk/return ratio compared to a direct investment in the stock strategy.
Investment Yield for Insurers
- Fixed income remains the primary driver of yield for insurance companies but as traditional strategies have generated declining returns in the low-yield environment, insurers face a difficult situation to help match guarantees on back-books or policyholders’ expectations.
- Insurance companies have been spurred to search for new investment opportunities, including alternative asset classes such as Long/Short investments. Yet they are sometimes wary of adding equity, lower rated corporate bonds or alternatives to their portfolio due to the high capital charges under Solvency II (SCR market ranging from 22.5% of a BB 5-year bond, 39% for equity and 49% for alternative assets).
- Moreover, these “performing” asset classes exhibit substantial volatility and drawdowns, that can lead to impairment (under IFRS or local GAAP).
- Volatility, in the full mark-to-market framework of Solvency II, can lead as well to uncomfortable variations of the SCR ratio by weighing on the available own funds.
Insurers facing both economic challenge and capital constraints
Source: Spence Johnson, “Deeper Perspectives” 2017
Source: Deloitte, Capital management in insurance survey2015
Capital-efficient solutions of most asset classes
THEAM Quant – Equity Factor Defensive Funds
A diversified investment into the main factors driving equity returns with a protection overlay
The funds are a risk-balanced portfolios composed of four core equity factors – momentum, quality, low volatility and value – aiming to provide capital growth by being exposed to a basket of European equities and by implementing a systematic options strategy which aims at reducing risk by minimizing volatility.
THEAM Quant – Equity Income Defensive Fund
A solvency-friendly equity strategy
The objective of the fund is to provide income and capital growth (i) by being exposed to a basket of high-dividend equities and (ii) by implementing a systematic options strategy which aims at generating additional income and reducing risk by minimizing volatility in the fund.
This strategy is available in a Eurozone version only.
High Yield Europe Defensive (“HYPE”)
Innovative systematic strategy providing a participation to high-yield returns at the capital cost of investment grade
Credit spreads are not particularly low, while absolute yield is. This leads to a difficult choice to get yield. High yield is often ruled out, despite its effective returns. Find out more about our THEAM Quant – High Yield Europe Defensive.
The objective of the fund is to provide capital growth (i) by being dynamically exposed to a long position on European high yield credit and (ii) by implementing a systematic options strategy which aims at reducing risk by minimizing volatility and drawdown in the fund.
THEAM Quant – Multi Asset Diversified Protected
A low SCR protected fund exposed to an award-winning multi asset strategy based on trends
The Multi Asset Diversified Protected fund seeks to increase the value of its assets over the medium term by being exposed to a diversified long/short basket, the components of which are chosen using a systematic selection method based on different asset classes (equities, fixed income, commodities and real estate). The exposure to the dynamic basket will be adapted in order to keep the annual volatility at a target level of 10%. In addition, the Fund benefits from a protection mechanism from BNP Paribas, whereby any investment made in the Fund benefits from an 80% capital protection of the maximum NAV over the previous sliding year.
- Diversified investment universe covering several asset classes to multiply investment opportunities
- Dynamic allocation, entirely reviewed each month, to ensure reactivity to changing market conditions
- An investor friendly framework: UCITS and with daily liquidity
- Partially protected investment with an 80% protection over 1 sliding year
THEAM Quant – Dynamic Volatility Carry
A defensive strategy designed to react positively when faced with major market drop episodes
The THEAM Quant – Dynamic Volatility Carry fund seeks to provide long volatility exposure during pronounced market stress scenarios, while exhibiting positive carry. The Fund is for qualified investors seeking an agile and efficient defensive solution that does not drag on portfolio returns. The Fund strategy is implemented systematically, and offers and optimized way of getting long exposure to VIX futures, while keeping a positive carry cost on the long run.