captive, it is necessary to “understand the risk or draw-down that is allowed on the non-reserved asset side of the captive”. “Today it is very much about employing strategies that help the investor survive market stagnation,” Marsh concluded.
Despite the need for liquidity and a safe investment approach, there are
opportunities for captives to eke out further returns in today’s troubled investment environment. Garland said that one area that captives can explore is emerging market debt, with returns on such instruments holding up well against those of developed markets. “Historically, captives and insurers have gone for developed fixed income and have viewed emerging market debt as a more risky asset class. But in some ways with the macroeconomic issues around the world, there is more risk in developed than emerging market fixed income at present,” he said. Marsh added that many of those instruments in developed markets that had been considered safe before the economic crisis—such as government bonds that still enjoy AAA ratings—are no longer the safe bets they once were. He argued that as an investment manager it is essential to understand the changed risk environment in order to be able to “deliver a cleaner total return stream”.
Garland also highlighted the potential of credit and high-yield instruments and even—over the longer term—emerging corporate debt. In the end
“CAPTIVES ARE THERE TO MITIGATE THE RISKS OF THE PARENT. IT IS A RISK REDUCTION RATHER THAN A MONEY-MAKING VEHICLE—AND THE INVESTMENT MANAGER NEEDS TO KEEP THIS FACT IN MIND.”
however, “captives are there to mitigate the risks of the parent. It is a risk reduction rather than a money-making vehicle—and the investment manager needs to keep this fact in mind”, said Dr. Durenard. As such, conservatism will inevitably be the watchword of any captive investment portfolio. Or as Marsh succinctly put it: “choose an investment manager who acts as your investment risk manager”. l
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