Our Cat Bond Investment Philosophy and Process
Cat bonds can offer investors a unique opportunity to potentially improve portfolio diversification and enhance risk-adjusted returns over the long term. We believe that this objective is best achieved through an actively managed portfolio that seeks to meaningfully diversify peril and regional exposures, and deliver a spread advantage with less concentration risk than that of the overall cat bond universe.
Exploiting market inefficiencies
Our investment approach is focused on taking advantage of the inefficiencies we see as inherent in the cat bond market. Our process seeks to deconstruct the complexities in cat bonds within each issue, including the expected loss profile of each peril in order to fully understand its risk-reward characteristics.
The cat bond market is also small—so liquidity is a factor we consider, along with concentration risk as to where reinsurance capital is deployed across the market. The cat bond universe is particularly concentrated toward certain events and regions such as Florida wind, where there is a significant threat of losses from hurricanes.
Our investment process
We employ a highly quantitative, proprietary portfolio optimization process, which we believe is essential to managing the event risks and concentration issues of cat bonds. Additionally, we are focused on disciplined security-level analysis, which is critical to evaluate complex cat bond structures to identify attractive investment opportunities and the best sources of diversification.
Our approach aims to find the right balance between returns and diversification. We seek to carefully construct a portfolio that owns the most efficient exposure to peak peril risks―as these categories tend to pay the highest premiums among catastrophe risks―while diversifying perils to counterbalance that concentration risk, and deliver a more attractive, value-added, risk/return profile relative to the universe.
The next video in this series will address the potential roles of cat bonds in a portfolio.
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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.