Staying calm, sticking to our process and continuing to evaluate the impact of catastrophe events on the portfolio is keyBrett Houghton, Co-Manager GAM Star Cat Bond
Reasons to Invest
Diverse source of returns
Returns are linked to the occurrence of catastrophes – such as earthquakes or windstorms – rather than economic drivers and therefore cat bonds tend to perform independently to traditional asset classes.Stable source of alternative returns
Cat bonds are a form of insurance-linked security (ILS) and provide an efficient solution for re/insurers to transfer insurance risk from their balance sheets to capital markets, while seeking to offer steady, attractive yields in a low yield environment.Low exposure to traditional risk
The uncorrelated nature of the asset class to the broader market means there is low exposure to credit, interest rate and financial market risk.Solid track record
Track record of delivering positive returns during differing market environments underpins the value of this asset class as a portfolio diversifier.Our Edge
Deep ILS experience
Established in 2001, Fermat's combined expertise in catastrophe re/insurance, investment, legal, trading, risk and modelling enables it to fully analyse each ILS on an absolute and relative basis.
Active approach to ILS selection
The team seek only the highest quality, most stable opportunities at any given time, with only ILS instruments providing the most attractive portfolio risk / reward impact selected for inclusion, rather than merely engaging in diversification for diversification's sake.
Unique risk modelling approach
The team utilise a proprietary modelling tool, harnessing the output of three major commercial catastrophe risk management packages, in order to identify unintended risk and correct any inconsistencies and biases. The combination of these tools gives the team an edge in accurate risk modelling and tactical portfolio decision making.Philosophy and Process
Investment Philosophy
The team believes returns from catastrophe investments are driven by a fundamental mismatch between re/insurance regulation and the demand for insurance created by rapidly rising coastal and urban concentrations of economic activity worldwide.
They believe that through active bond selection and management, they can construct a portfolio of cat bonds with a risk-return structure that aligns with the best paying re/insurance risks, and therefore capture alternative beta at the optimal risk-return level. Their approach focuses on 'peak peril' exposures while maintaining a rational level of diversification.
Investment Process
The team's process centres on extensive due diligence, deep market understanding and sophisticated risk modelling. In-depth analysis of issues is performed by specialist investment and legal experts.
In order to price and select those ILS that are taken forward for consideration, the team uses sophisicated risk modelling tools - focusing on ILS exceedance curve modelling, market exceedance curve modelling and implied yield curve modelling - to understand the bonds’ true risk. They seek to build a portfolio containing only clearly modelled, well-compensated risks that are supported by quality data, and then to actively manage risk. The resulting portfolio of approximately 150-200 positions constructed on a bottom-up basis, with those bonds providing the most attractive portfolio risk/reward impact being selected for inclusion.
1. Due Diligence
- Comprehensive review of structures, terms and risks
- Comparison versus existing market and new issue pipeline
2. Pricing and Selection
- Sophisticated proprietary modelling of each investment
- Understanding risk is key to determining price
3. Portfolio Construction
- Optimise portfolio's risk/return profile
- Risks actively managed on a daily basis
Investment Team
Fermat is a recognised insurance-risk industry leader and highly experienced cat bond manager, based in the US. The portfolio managers, Dr John Seo, Nelson Seo and Brett Houghton, manage assets of approximately USD 6.7 billion have over 50 years' combined experience in ILS and cat bonds, dating back to the inception of the market in the late 1990s.
The level of experience and in-depth market knowledge is critical to Fermat's ability to identify the true risk of each bond as well as granting them ready access to new issuances.
Over time, the team have demonstrated their expertise by actively trading billions of dollars in catastrophe bonds through a series of large insurance industry events and natural catastrophes, while providing stable return for clients and maintaining high levels of liquidity.
Fermat differentiates itself with a focus on adequate compensation for identifiable risk while avoiding uncompensated risk.Dr John Seo, Co-founder and managing director, Fermat Capital Management LLC.
Fund Information
Key Risks
Capital at risk
All financial investments involve an element of risk. Therefore, the value of the investment and the income from it will vary and the initial investment amount cannot be guaranteed.
Credit Risk / Non-Investment Grade
Non-investment grade securities, which will generally pay higher yields than more highly rated securities, will be subject to greater market and credit risk, affecting the performance of the Fund.
Interest Rate Risk
A rise or fall in interest rates causes fluctuations in the value of fixed income securities, which may result in a decline or an increase in the value of such investments.
Credit Risk / Debt Securities
Bonds may be subject to significant fluctuations in value. Bonds are subject to credit risk and interest rate risk.
Insurance-Linked Securities Risk
Cat bonds are exposed to catastrophes through which they may suffer substantial or total losses of amounts invested. In such an event or combination of events, which may happen at any time, the Fund’s value may fall significantly and may not recover.
Liquidity Risk
Some investments can be difficult to sell quickly which may affect the value of the Fund and, in extreme market conditions, its ability to meet redemption requests.
Resources
Contacts
Gam Star Cat Bond is a sub-fund of GAM Star Fund p.l.c., registered office at George’s Court, 54-62 Townsend Street, Dublin 2, Ireland, an umbrella investment company.