Investment grade fixed income has historically been seen as a safe haven for investors but the total return on the Bloomberg Investment Grade Corporate Index for 2021 was -1.0% and US junk bonds now yield less than 4% with a projected 9% default rate.
Bond prices are sensitive to interest rates and inflation; the likely direction of interest moves over the coming months is upwards which will result in falling prices and inflation erodes the real value of a bond’s face value which is a particular concern for longer maturity debt.
The markets have priced in five (upward) interest rates moves by the Fed and current yoy inflation is above 8% with the broader market expecting inflation to average 3.34% according to a recent 5-year TIPS auction.
Bonds currently are not providing returns above inflation; as Warren Buffet puts it, they offer “return-free risk.”
Today’s fixed income investors face a real dilemma
The worst news for bond investors may come from Credit Suisse, whose analysis confirms that, in today’s markets, bonds no longer offer diversification from equity risk. Many investors have turned to real estate or real estate debt for fixed income alternatives but there are danger signs here too.
One asset class still providing an attractive risk/return profile is Life Settlements, which continues to offer strong fundamentals, an above average yield, low credit risk, and genuine diversification.
Life settlements as a solution
A life settlement is a life insurance policy which has been sold to an investor who paid the insured a cash sum (in 2021 on average 7.8x higher than the contractual surrender value offered by the insurance company) and where the investor takes on the obligation to pay the premiums and eventually collects the death benefit. Life insurance is a product which is universally understood and mortality is not correlated with markets or politics so it is immediately obvious that a fund that derives its returns from mortality will not be correlated to financial or geopolitical markets.
Most Life Settlements are backed by insurance companies rated A or better, and a well-structured portfolio can provide regular cash flow and returns well in excess of current inflation.
Well managed portfolios of life settlements, such as the Laureola funds which derive gains from maturities as opposed to accounting gains will deliver on the fixed-income ideal of:
- Not being correlated with equity markets (and in the life settlement case, any financial market);
- Having very low credit risk;
- Generating cash.
Nathan Wares
Managing Director
Australia & New Zealand
Laureola Advisors
nathan.wares@laureolaadvisors.com
Level 1, 60 Martin Place
Sydney NSW 2000
+61 419 542 646
John Swallow
Director
Laureola Advisors
john.swallow@laureolaadvisors.com
UK