CIO view: the trick to getting global credit investments right
Erik Ranberg, Chief Investment Officer at Gjensidige explores how insurers can manage the transition to global credit and what needs to be considered in terms of hedging
Insurance Investorposted on Tuesday, August 11, 2020
Insurance Investor: How should insurers approach the transition to global credit? When is a good time?
Erik Ranberg: There isn’t one answer to this question. For us, it has been a question of getting diversification into our credit portfolio.
As for the timing of these investments there might be relationships in the yield curves that drive you to take on international credit.
The whole transition into global credit has been about diversification, yield and, coming from Norway, we also seek to have liquidity.
"For us, it has been a question of getting diversification into our credit portfolio."
The answer then much depends on where you are starting from and what can be achieved compared to your domestic market.
If you have a portfolio of a certain type, within the Norwegian market, it can easily become crowded and you can become too big for the market.
Diversification into international markets is a possible way to reduce that risk.
Insurance Investor: What is your outlook on risk for investment grade credit? How concerned should insurers be about volatility and potential defaults?
Erik: We should be quite vigilant to this kind of risk, but it is a very different situation from where we were in 2006 when we also had very low spreads.
In the event of a downturn in the economy, the default cycle would evolve quite differently from last time, which is due to the awareness amongst policy makers about what would happen if this were going down.
Insurance Investor: What are the costs of currency hedging when investing in dollar bonds so as to not be exposed to currency volatility?
Erik: You just have to look at the yield curves to see how they are, and you then see what your carry costs or carry will be.
For the time being as an investor with NOK as base currency it is still a cost in there, but we have seen it worse. It is just part of the game.
Of course, sometimes the yield curves are different and then you have a carry from the
hedging so it can go either way.
Insurance Investor: What are the additional capital requirements that you get from FX and currency risks from a Solvency II perspective?
Erik: Due to the volumes within FX hedging, it actually costs a bit in the Solvency II regime, but it is just a cost that you have to take.
If you don’t want to take on this extra cost, then you should stay out, or you will have the cost in the form of currency volatility.
You do not find the same diversification as you have for equities and FX in the fixed
income / credit and FX.
"Euro credit is looking quite good compared to our home market and we even have the ECB buying it."
When we go abroad in the fixed income market, we take away the FX volatility and we do this so long as we see a net contribution from what we can do in our own currency.
We are into a bigger and more liquid market and for the time being we have a positive carry from the currencies since our base currency is the Norwegian krone.
Euro credit is looking quite good compared to our home market and we even have the ECB buying it.
That is a good sign as it isn’t in all markets that you will see the central bank actually supporting the credit market in that way.
Insurance Investor: Is it worth investing in dollar bonds or is it better to invest in Euro bonds when you juxtapose the currency hedging costs against the diversification benefits?
Erik: The two markets offer quite a few differences.
The Euro market has its own caveats, which is also true in the US market. So, it depends on what you are looking for and what situation you are in.
The US index-linked market is very interesting and has worked well for over a year now. I’m not sure whether this would have worked as well in the European market, but we have found this works better in the US.
In other ways, the Euro market is looking better. The fact that the central bank is buying so much of their credit shows their support of that market.#
To us, it isn’t a question of whether it is worth it or not. All markets have periods where it is worth investing in and it isn’t always an either / or.