Picture this, you have several billion Euros to invest in fixed income type products every year and are expected to deliver a return which outperforms the market. You are required to invest in relatively low risk debt instruments. You have to contend with the consequences of Central Banks weaning the markets off Quantitative Easing and the uncertainties as to which of the many muted regulatory regimes will be implemented and in what form. Lastly, you must keep a close eye on performance of your portfolio and the potential for mark to market losses. Welcome to the world of the fixed income investor. With this in mind, we surveyed fixed income investors to find out what investment strategies investors intend to deploy over the next eighteen months.
Real estate investments have always been one of the main investment categories of insurance companies, especially for life insurers. Despite the long-term nature of real estate assets, calculating their duration remains challenging. As a consequence, the policy-makers who are devising the new regulatory regime for European insurers, Solvency II, have decided to adopt very punitive capital requirements for insurance companies holding these investments. In this Market Insight, we contend that the uniform approach to all real estate assets across all jurisdictions that is adopted by Solvency II’s standard model is not justified. We derive a statistically significant duration for residential real estate in multiple European countries. Based on this, we argue that Solvency II should adopt a much more tailored and risk-appropriate approach to capital weightings for real estate investments. Such a change is important because it could re-enable insurance companies to invest in real estate, a crucial ingredient to economic recovery in Europe.
In the aftermath of the financial crisis regulators are moving ahead with the separation of the high street and investment operations of banks. Ringfencing of the retail operations of banks is an alternative to forcing complete de-mergers. Supporters of ringfencing argue that the financial system’s stability will increase whilst banks will be able to retain some of the diversification benefits offered by the existence of retail and investment franchises under the same corporate umbrella. But is ringfencing a sustainable solution? This article examines the concept of ringfencing as pioneered in the UK, issues around its implementation and whether it is likely to achieve what it is designed for.