Catastrophe bonds are a high-yield debt instrument that is usually insurance linked and meant to raise money in the case of a catastrophe such as a hurricane or earthquake. They typically have a very low correlation to other asset classes, appealing to investors looking for greater diversification and also offer protection against interest rate rises.
The ability of the new Schroders Flexible Cat Bond fund to invest in the private catastrophe bond market or ‘cat bond lites’, gives it additional diversification opportunities.
“We are very excited about the cat bond lite market, which we expect to grow significantly in the coming years,” Tim van Duren, investment director, insurance-linked securities at Schroders, said.
The new fund can invest globally, although its portfolio will be biased towards the more developed markets in the US, Western Europe and Japan, which have high levels of wealth accumulation and insurance penetration.
The fund is managed by Daniel Ineichen, who currently manages $1.6 bn of insurance-linked securities strategies worldwide.
However, Schroders said it will work with Secquaero Advisors, a reinsurance specialist boutique that acts as exclusive investment advisor, to manage the fund’s insurance-linked securities (ILS) strategies. The total ILS team consists of 21 professionals – one of the largest ILS investment teams in the industry.
The Schroder IF Flexible Cat Bond will target returns of cash (3 month USD Libor) + 6% per per annum over an insurance cycle.