London-based Pool Re, a £6.5 billion ($9.08 billion) terrorism risk reinsurer, astutely shifted 20% of its investment portfolio out of credit, multi-asset credit and equities in favour of short-dated UK government bonds over the past month, over concerns that lofty equity valuations could topple as the Covid-19 pandemic rolls on.

As the market correction since early September has proven, it was an astute move. 

“We have reassessed our risk profile following concern about the economic uncertainty [created by the impact of the pandemic],” Ian Coulman, Pool Re’s chief investment officer (CIO), told AsianInvestor a few days ahead of the drop in technology stocks that began on September 4.

Ian Coulman

The insurer made the tactical shift via existing passive equity mandates as well as its investment grade credit mandates. All of its portfolio is externally managed.

Coulman said Pool Re cut its investment grade credit mandates from 60% of its portfolio to 45% since early August, shifting the money to short-dated gilts, as a risk-aversion measure. At the same time it reduced multi-asset credit investments from 5% to 3.75% and cutting equities from 15% to 11.25%.

It marked a sensible shift. Many investors welcomed the speed of the stock market since the March nadir but worried that the economic fundamentals do not support such a rebound, particularly with new surges of Covid-19 cases still emerging across the world.

Pool Re’s souring on equity and credit investments had followed a fortuitous end of quarter rebalancing in late March. Falling prices had reduced the fund’s equity and high yield bond allocation below target so it sold expensive government bonds and bought cheap equity and high yield investments. This was very well-timed; the MSCI World index rose by 51.41% from its March 23 nadir to September 2, before slipping 5.8% again as of Tuesday (September 8).

“It was more fortunate timing than judgment,” admitted Coulman. He declined to say how much Pool Re’s equity investment had performed, year to date.

Today, 45% of Pool Re’s investment portfolio is in investment grade corporate bonds; 10% is in index-linked UK government bonds, 25% sits in conventional UK government bonds, 11.25% is invested in equities (7.5% in global equities and 3.75% in FTSE 100); 3.75% in multi-asset credit, 2.5% commodities and 2.5% is based in alternative risk premia products. The fund currently uses 10 external fund managers.

Coulman said Pool Re invests into Asia via global funds, but it does not have any specific allocations to the region.

VENTURE CAPITAL FORAY

Pool Re is also halfway through committing £65 million (1% of its AUM) to venture capital funds, mainly in the UK, which comprises its first foray into private markets. Allocations will mainly come through cash flows such as through premiums, as and when the VC funds call upon them.

“Essentially [these investments] fit in with our risk management strategy to invest in new companies that are developing products or services designed to ensure the UK is a safe and secure place in which to live and do business,” Coulman told AsianInvestor.

Pool Re has spent the last 12 to 18 months conducting due diligence on a selection of a shortlist of suitable managers provided by the British Business Bank (BBB), a UK government-owned economic development bank.

Colman said BBB has shared with Pool Re details of the VC fund managers that it has invested in via the National Security Strategic Investment Fund (NSSIF) Programme, an £85 million fund launched in July 2018 to provide long-term equity investment in advanced technologies that have an application to national security (as well as be applied in a commercial setting).

Pool Re has selected four VC fund managers (in addition to its 10 existing managers) and is talking with two others, and Coulman predicts it will select eight in total. Requirements for the fund managers include accreditation under the UK government’s National Security Interface Centre (NSIC), which requires security vetting, and a major investment in UK businesses.

ARP ON STANDBY

Meanwhile, the fund’s ARP investments had had a poor year. Coulman declined to give performance data but said Pool Re would re-assess its investments in the asset class to unless the products enjoyed a turnaround over the next six to 12 months.

“We have been disappointed with the performance of ARP since we got involved in early 2018. It hasn’t generated the sort of stable consistent returns that we expected, and value has been a particular problem.”

The insurer currently has three external quantitative managers investing in, whose strategies encompass equity, fixed income, currencies and commodities combining risk premia strategies of trend, momentum, volatility, low beta, carry and quality and value.

In contrast to ARPs, Coulman said he is very happy with his multi-asset credit allocation, which includes high yield, emerging market debt and contingent convertibles.

The CIO said that he was confident with manager reports that identified some strong current opportunities and value in emerging market debt, including in local currencies, despite the fact many investors have avoided these recently over concerns about currency fluctuations.

Indeed, his confidence stands apart from many of his peers. In a July survey published by Bfinance, 53% of institutional investors using active emerging market debt strategies were dissatisfied with their performance in the first half of 2020.

Investments aside, Coulman said Covid-19 is not the only danger lurking in the world. He noted that the overarching nature of the pandemic could lead people to insufficiently consider other threats such as terrorist attacks.

That said, the pandemic has helped decrease the dangers of a major terrorist strike. “With fewer people out and about, there are fewer [terrorist] targets, given that current terrorists focus on life not property,” he noted.