Investors continue to look for new ways to improve returns in the current low-yield fixed income environment. They are also seeking new sources of diversification as global markets become more correlated.
Catastrophe bonds (or “cat bonds”) offer a solution to both challenges. Insurers use catastrophe bonds to replace traditional reinsurance by paying investors to assume a portion of the risks associated with major natural events, such as a hurricanes or earthquakes. To attract these investors, insurers offer them the opportunity to earn higher yields. Catastrophe bonds also offer diversification benefits because they are not influenced by the economic and geopolitical factors that drive the performance of traditional assets, such as stocks and bonds.
Although the asset class comes with its own unique set of risks, it offers investors the potential to enhance the performance and the risk-return profiles of their portfolios.
Read our full perspective on finding an alternative approach to portfolio diversification.
* Source: Aon Benfield Securities, Inc.
Fixed income investing entails credit and interest rate risks. When interest rates rise, bond prices generally fall, and a fund’s share price can fall. Event-linked securities, otherwise known as Cat Bonds, are fixed income securities for which the return of principal and interest payment is contingent on the non-occurrence of a trigger event that leads to physical or economic loss. If the trigger event occurs prior to maturity, event-linked securities may lose all or a portion of their principal and additional interest. Investments in below-investment-grade (“high yield” or “junk”) bonds are more at risk of default and are subject to liquidity risk. Foreign investments may be volatile and involve additional expenses and special risks, including currency fluctuations, foreign taxes and geopolitical risks. Emerging and developing market investments may be especially volatile. Diversification does not guarantee profit or protect against loss.
These views represent the opinions of OppenheimerFunds, Inc. and are not intended as investment advice or to predict or depict performance of any investment. These views are subject to change based on subsequent developments.