3 Reasons to Consider a Cat Bond Strategy
The primary reasons to consider an investment strategy that includes cat bonds are diversification, attractive yields and the potential of improving risk-adjusted returns.
Cat bonds are not typically sensitive to global financial markets because their value is tied to the occurrence of natural events such as hurricanes and earthquakes. This attribute means they can offer an uncorrelated return stream to traditional assets including equities and fixed income. For this reason, they have the potential to meaningfully enhance diversification and possibly smooth out returns across market cycles, while lowering portfolio volatility and ultimately improving risk-adjusted returns over the long term.
Holders of cat bonds receive a premium for assuming the reinsurance risk of a catastrophic event. This premium is paid to the investor as part of the bond’s coupon. If no events occur, the investor enjoys the enhanced coupon for the term of the bond, and receives the principal back at maturity. If a trigger event occurs, all or part of the principal is transferred to the insurance company, and coupon payments are reduced or stopped. Cat bond premia has generally ranged from 5%-7%, allowing investors to earn attractive yields compared with other investments in the current low-rate environment.
3. Risk-adjusted returns
Cat bonds have historically delivered strong returns over the past 10 years primarily due to the fact that investors have seen more negative impacts from events driven by economic and financial market stress, rather than events based on natural perils that have been catastrophic to the insurance industry.
Given the opportunity to improve diversification and risk-adjusted returns with an attractive yield generated by cat bond coupons—we believe investors can consider incorporating cat bonds into their allocations to enhance their portfolios.
Our next video in this series will address our philosophy and process of investing in cat bonds.
Follow @OppFunds for more news and commentary.
Past performance does not guarantee future results.
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. Diversification does not guarantee profit or protect against loss.
Mutual funds are subject to market risk and volatility. Shares may gain or lose value.
These views represent the opinions of the Portfolio Managers at OppenheimerFunds, Inc. and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the publication date, and are subject to change based on subsequent developments.