MLC ILS portfolio averages cash +5% over 16 years, with zero beta to equities: Abley

Investing into an asset class like reinsurance whose performance is not influenced by movements in global share prices is seen as a “powerful way to build more robust, resilient portfolios” by MLC Asset Management’s Gareth Abley, who also disclosed that the MLC catastrophe bond and ILS portfolio has averaged an impressive cash +5% return over a 16 year period.

In a recent article, Gareth Abley, the Head of Alternative Strategies at Australian investment firm MLC Asset Management, lays out the case for investing into catastrophe bonds and other insurance-linked securities (ILS), while also providing some insights into the performance of the MLC ILS portfolio, which as an allocator is among the longest-standing in the space.

MLC Asset Management is now in its 17th year of allocating to catastrophe bonds and other forms of ILS and continues to see the asset class as a valuable, complementary and diversifying source of returns.

The cat bond in particular is highlighted as a “strategic diversifier” that continues to stack up versus more traditional asset classes in a higher interest rate environment, thanks to the floating nature of its returns.

Market growth in catastrophe bonds is reflective of their rising popularity, Abley notes, and they are seen as a “valuable addition to a well-rounded investment portfolio,” thanks to the diversification, relatively high yields and unique risk profile.

Now is also an “excellent time to invest” in catastrophe bonds, given the cat bond market yield remains historically very high, Abley explains.

But, the reinsurance market is even more dynamic, with far more options for investors to deploy capital than just catastrophe bonds alone, Abley highlights.

MLC Asset Management has made a positive return in the 16 years since it began allocating to ILS in 2007, Abley said.

The manager invests across cat bonds and other reinsurance assets, via a range of specialist managers and strategically allocates capital based on where spreads are currently most attractive.

As a result, MLC increased its catastrophe bond allocation in early 2023, Abley explained, but has now dialled that back and increased its allocation to private reinsurance contracts (private ILS), finding that relatively more attractive at this time.

As a result, MLC’s portfolio in ILS, which amounted to around US $1.6 billion this year, is currently roughly 20% allocated to cat bonds, 80% to other private reinsurance focused ILS opportunities.

Most impressive though is the track-record of MLC’s allocation and how that has benefited from the thoughtful approach Abley and his colleagues have taken in managing the ILS portfolio.

“Over the 16 years, MLC’s portfolio has averaged returns of cash +5 per cent, with a zero beta to equities,” Abley explained.

Adding, “What’s also been noteworthy, over that period, is the huge growth of the sector, and its increasing sophistication and maturity. This evolution has made cat bonds an even more attractive option for diversifying investment portfolios. Holding an investment whose performance is not influenced by the stock market’s ups and downs is a powerful way to build more robust, resilient portfolios.”