Pramila Agrawal: Our core buy and maintain philosophy is that there is a risk premium embedded within different markets so fundamental research is the way of identifying these longer term, attractive investment opportunities.
Our approach to buy and maintain is contingent on three factors, credit, construction and customisation.
We believe that since the key risk in any buy and maintain portfolio is the expected loss from credit migration, it is very important to do very careful bottom-up security selection and through the cycle, deeply researched, well diversified portfolios that can minimise this migration risk whilst getting the desired income.
Keeping this as our approach, in today’s environment with all of the accommodative central banks and trade volatility, we have a few insights into buy and maintain strategies.
"The key risk in any buy and maintain portfolio is the
expected loss from credit migration."
The first is that as we are getting deeper into the late cycle and supposedly this could be one of the longest expansions in the US as we have already exceeded ten years, we feel that understanding the risk premia in different markets is very important.
Yield alone is not a marker for attractiveness and we pay a lot of attention to what the fundamentals are, as well as what the overall default and loss trends are, of any asset class before we invest.
The other element that is important in today’s environment is security selection which has always been a core of our process and has now become even more important.
We carry out stringent stress tests to ensure that the securities that do make it into buy and maintain are valued correctly, because the important thing is that these are very low turnover portfolios so we don’t get in and out on tactical trades which means that we have to take a long term, fundamental view on the names that we buy.
"We have a yield curve in the front end that is posing a
lot of challenges to buy and maintain investors."
Given the very depressed yield environment right now, it is very easy to reach out for yield.
We have a yield curve in the front end that is posing a lot of challenges to buy and maintain investors because the front end of the yield curve is signalling that we stay in shorter mandates or we go further and long enough to pick up yield or even that we pick lower in quality to get yield.
These strategies seem counter intuitive in today’s environment when you want to be more risk averse where really the way to reach yield is by embracing risk.
Pramila: Given how depressed the yield environment is which is not new as we saw a similar environment in 2014/15 and have seen it multiple times before, in these kinds of yield environments there has to be a cautious approach taken.
Going longer in duration has always been one of the prime ways of getting more yield but as we do this, we have to be very cognisant that we are taking more added risk.
"We want to make sure that the asset classes we are investing
in having a healthy forecast and strong anchoring."
When going longer in duration we want to ensure that from a credit standpoint we are not doubling down on credit risk.
Branching out to different asset classes is another method for achieving yield and we can see that outside of DM, EM has also had a sell off recently… those are some of the levers that insurers can pull but it is important to ensure that for stable and predictable income, we need to keep a close eye on default trends.
At the end of the day we want to make sure that the asset classes we are investing in having a healthy forecast and strong anchoring.
