Richard Sarsfield, European head of insurance solutions at Morgan Stanley Investment Management, explains why insurers need a dynamic and innovative investment partner that can quickly respond and adapt in times of volatility
What measurable benefits can a multi-asset strategy offer insurers in the current environment?
With a turbulent start to 2022, it's clear we've entered a new economic regime, as a hawkish Fed prepares to hike rates, and other regions make or contemplate similar moves, given inflationary pressures. Combine extraordinary economic developments with rapidly changing and significant geopolitical risks, and the outlook is more of the same volatility.
With this in mind, the challenge to insurers' strategic asset allocation approaches is often highlighted when they have to quickly respond to market changes, for example those exhibited in recent years. Significant alpha can be missed without the ability to adapt and respond in a timely way.
Before the introduction of Solvency II, outsourcing an element of tactical asset allocation was more commonplace, but since the introduction of Solvency II with prescribed capital charges that vary widely, control of capital has taken precedence over outsourced tactical management.
Morgan Stanley Investment Management's (MSIM's) Global Balanced Risk Control (GBaR) strategy aims to provide a solution to this key issue, utilising tactical asset allocation to dynamically adjust positioning between equities, fixed income and cash, to successfully navigate such changing market conditions, but control capital at the same time. It's this dynamic allocation approach that insurers can benefit from in outsourcing, leveraging the GBaR strategy, seeking to participate in rising markets and to limit downside in volatile markets.
A customised risk-based capital limit (Solvency Capital Requirement (SCR) in Europe) allows clients to retain control of capital budgeting when outsourcing tactical multi-asset mandates, which by nature can otherwise exhibit a volatile capital requirement, unsuitable for insurers. For the GBaR strategy, there is no traditional benchmark, but rather risk is an objective, defined in terms of value-at-risk (VaR). This approach to targeting risk and limiting capital is neatly aligned with Solvency II governance, risk oversight, and capital control.
The strategy's flexibility allows for clients' changing SCR constraints and target returns over time as necessary. While the GBaR approach can seek to maximise return on capital, the risk dimension does imply that a capital budget may not always be fully utilised. As equity exposure is a key driver of overall risk, a target risk level will directly vary equity exposure over time. The strategy is also highly customisable with regards client guidelines, instruments used for implementation, and may exclude or include asset classes, as required.
Why should insurers come to Morgan Stanley for investment expertise in general?
MSIM's specialist insurance solutions team partners with multi-asset teams, including GBaR, to design innovative approaches for insurance clients, offering solutions to incorporate capital efficiency, capital guideline limits, and customised risk and return objectives. Morgan Stanley's investment teams leverage the firm's broad infrastructure, resources and multidisciplinary expertise, to deliver the right solutions for our insurance clients. Indeed, for many years the GBaR team has partnered with other investment teams such as the Global Fixed Income team, to deliver efficient portfolio solutions for insurance clients. Thus, we support clients with access to combined and deep expertise in each of these disciplines.
What were some of the key themes for MSIM in 2021?
2021 was an exciting year for Morgan Stanley Investment Management with the acquisition of Eaton Vance, increasing assets under management to c. $1.6trn as at 31 December 2021, and bolstering the products and solutions, from across the public market spectrum, that we can offer our Insurance clients. We also saw an increases appetite from insurers for access to alternatives products, such as private credit and equity in addition to real assets, as they sought opportunities in a low yield environment.
How can MSIM's climate strategy support insurers in the current environment?
MSIM's new climate strategy seeks to combine compelling private equity returns with a measurable positive climate impact with the aim to catalyse 1 gigaton reduction of CO2 emissions. When assessing companies, MSIM believes it is essential that a climate solution should be intrinsic to a company's business model. MSIM has tied carried interest to both financial and impact return hurdles, with independent verification of the portfolio's performance, and designed a strategy that takes into account Solvency II. Our strategy will seek to deliver a sustainable private equity liquidity premium to insurers, and at the same time, the insurer can directly link their capital to a reduction of 1 Gigaton of CO2. This is a meaningful contribution in combatting the climate crisis.
We have been climate investors for well over a decade, starting at a time when this space wasn't particularly well-understood. Having witnessed these challenging times for climate investments, we are sceptical of over-promises in early-stage opportunities that entail technology risk. We also eschew anything that relies on significant subsidies to scale up.
What are the features of MSIM's climate strategy for accessing private equity?
We're a global firm providing our portfolio companies - which range from software in the US to fertiliser in Asia - with access to market leading resources from across Morgan Stanley's global platform. Being a leading sustainability investor in any capital syndicate puts us in a strong position, from advising on charting a path to net zero to providing insights about what it takes to trade at a "sustainability premium".
This is an advantage at sourcing and at exit, which we believe directly translates into value for our insurance clients. It also helps enhance the creation and reporting of the transformational climate impact we have committed to deliver to our insurance clients in a very tangible way by designing a climate-linked carried interest structure.
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The views and opinions are those of the MSIM Insurance solutions team as of the date of preparation of this material and are subject to change at any time due to market or economic conditions and may not necessarily come to pass. The views expressed do not reflect the opinions of all Investment teams at Morgan Stanley Investment Management or the views of the firm as a whole. The value of investments and the income from them may go down as well as up and you may not get back the amount you originally invested.
This marketing communication has been issued by MSIM Fund Management (Ireland) Limited. MSIM Fund Management (Ireland) Limited is regulated by the Central Bank of Ireland. MSIM Fund Management (Ireland) Limited is incorporated in Ireland as a private company limited by shares with company registration number 616661 and has its registered address at The Observatory, 7-11 Sir John Rogerson's Quay, Dublin 2, D02 VC42, Ireland.
