Theme 5:
Portfolio diversification
Looking beyond traditional asset classes to deliver
diversification.
While recent market conditions have encouraged insurers
to focus on their fixed-income portfolios, many are now reexploring ways to diversify their investments and adapt to
market change as they move to implement Solvency II and
address wider macroeconomic shifts.
Historically, insurers invested in equity and real estate to
diversify their investment portfolios and mitigate their
exposure to interest rate and inflation risks. The introduction
of Solvency II is creating a catalyst for insurers to reassess
their investment and diversification strategies as they move
to match their assets and liabilities ever more closely.
While the market still awaits confirmation on the capital
treatment of many investment instruments under the new
regulation, it is clear that some asset classes commonly
used to diversify portfolios, such as equities, will be exposed
to relatively higher capital charges under the new regime.
This will make some traditional diversification strategies
more costly for insurers.
Against this backdrop, a number of alternatives offering
attractive returns and strong liquidity may prove increasingly
relevant. These include absolute return strategies, which
are managed to deliver a “cash plus” return while mitigating
drawdown risks. Diversified growth strategies which offer
similar benefits with a slightly higher risk/return profile,
may also be considered.
In the final analysis, the overall approach to building a
diversified investment portfolio for the long-term must be
sensitive to multiple sources of risk and meet the long-term
needs of the investor. What is clear is that in a changing market
set to embrace Solvency II, insurers may increasingly need to
look beyond traditional investment in equities and real estate
when diversifying their portfolios.
Whatever diversification strategies are selected, BNY Mellon
is committed to helping clients achieve their objectives. We
work in partnership with our clients to help them articulate
the specific investment goals of their organisation, designing
strategies that will help deliver against them across a wide
range of asset classes.
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