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Strategy update
Change in MLC’s insurance-related investments strategy
September 2015
“Our scale has enabled us to access a specialist reinsurance business
to gain attractive exposures and powerful diversification which aims to
improve expected net returns for our investors.”
At MLC, we actively manage our portfolios and work continually to refine them
as opportunities arise.
That’s why we’re making changes to our insurance-related investments strategy for
MLC’s Inflation Plus and MySuper portfolios.
Nephila Capital Ltd (Nephila) has been an insurance-related investments manager in
these portfolios since 2007. We’re now removing this manager and reallocating the
assets to newly appointed manager, AlphaCat Managers Ltd (AlphaCat).
Gareth Abley
Head of MLC Alternative Strategies
Which funds are affected?
The following funds across our platform product range are affected by these
changes:
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MLC Inflation Plus portfolios , and
MLC MySuper.
What are the changes?
MLC Horizon also has an indirect allocation through its investment in the MLC
Inflation Plus strategies.
AlphaCat appointed
Nephila removed
How may investors benefit?
We expect the benefits of this change to include:
a tailored portfolio of risks that will evolve based on the opportunity set
exposure to attractive, diversifying insurance-related investments, which should
deliver
more reliable long-term net returns for investors.
What are insurance-related investments?
These are investments in natural catastrophe risks. Investors take on the role of an
insurer. They receive a yield - effectively an insurance premium - for taking the risk
of a particular natural catastrophe causing losses above a certain level.
Insured events are typically for relatively low probability events, such as major
hurricanes and earthquakes.
As the occurrence of natural catastrophes has no expected correlation with share
market movements, the strategy is an attractive source of diversification. For
example, during the global financial crisis, shares fell but insurance-related
investments performed well.
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Funds affected by these changes are listed in the Important Information at the end of this
document.
Change in MLC’s insurance-related investments strategy
1
Strategy update
Change in MLC’s insurance-related investments strategy
Why invest in insurance-related investments?
Insurance-related investments provide our portfolios with access to uncorrelated sources of risk and return. These investments are
expected to deliver a return that is between the more traditional assets of shares and fixed income. In addition, its significant
portfolio diversification characteristics reduce total portfolio risk, which improves the risk-return efficiency of the portfolios.
Insurance-related investments are unusual because their returns are independent of the economic factors that influence the
performance of most other investments. This makes them a rare and valuable source of returns that are largely “uncorrelated” with
returns from shares.
Another distinctive feature of these investments is the visibility regarding its risk-return profile. Unlike other asset classes, where
generally the expected returns are higher when risks are higher, in reinsurance the risks of a catastrophe occurring does not
change materially from year to year, but the pricing can. This provides us with the ability to dial up and down our portfolio exposure
according to the relative attractiveness of the pricing.
Certain risks tend to get paid relatively better returns. This is because there is a large economic exposure in the US to densely
populated areas with expensive real estate - Florida (hurricane) and California (earthquake) being prime examples – that also
happen to be exposed to major natural catastrophes. It therefore makes sense for the reinsurance industry to reduce some of their
exposure to these risks, particularly the very low probability high impact events (which could jeopardise their solvency). This
enables MLC’s investors to get paid well for taking these ‘remote peak peril’ risks, while also benefiting from the diversification
benefits.
The insurance-related investments strategy has worked well for the MLC Inflation Plus and MySuper portfolios. The insurancerelated investments strategy has made an important contribution to real returns in our portfolios and helped to moderate risk. The
strategy has low correlation to shares and has delivered 9% pa in the seven years to 31 July 2015 (hedged into Australian dollars
and net of investment fees), when it was first introduced to the MLC Inflation Plus Assertive Portfolio (as shown in Graph 1).
Graph 1 – Performance of insurance-related investments relative to global shares (rolling 12 month returns)
Insurance-related investments
MSCI ACWI Hedged
60%
50%
40%
30%
20%
10%
0%
-10%
-20%
Jul-15
Apr-15
Jan-15
Oct-14
Jul-14
Apr-14
Jan-14
Oct-13
Jul-13
Apr-13
Jan-13
Jul-12
Oct-12
Apr-12
Jan-12
Oct-11
Jul-11
Apr-11
Oct-10
Jan-11
Jul-10
Apr-10
Jan-10
Oct-09
Jul-09
-30%
Source: MLC Investments and MLC Limited. Past performance is not a reliable indicator of future performance.
Full manager profiles for managers in our portfolios are available on mlc.com.au
Why we’ve appointed AlphaCat
We continue to have confidence that Nephila is a well-credentialed manager. One of the main benefits of appointing AlphaCat is
that it enables us to access the risk exposures that we find attractive, more directly and cost effectively than via a pure specialist
manager such as Nephila. This is because AlphaCat benefits from the sourcing and underwriting expertise of its parent company,
the Validus Group (Validus), a specialist global reinsurance business.
AlphaCat, which was established by Validus in 2008, specialises in managing a portfolio of insurance-related investments and is
able to benefit from the sourcing and underwriting expertise of its parent. These investments are in a range of natural catastrophe
Change in MLC’s insurance-related investments strategy
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Strategy update
Change in MLC’s insurance-related investments strategy
risks, including our preference for US (wind and earthquakes), and to a lesser extent, European wind and Japan earthquakes. The
reinsurance market is unusual in that investors are paid a higher return in US wind, for example, for bearing a similar level of risk to
other ‘non-peak’ perils. It therefore makes sense to skew our strategy to these ‘peak perils’ because they pay a higher return for the
same risk.
The firm’s new mandate for MLC is in two parts.
The first being to manage catastrophe bonds, a type of insurance-related investment. This involves taking over the bespoke
mandate that Nephila has historically managed for MLC.
The second part of our mandate is to access our desired insurance risks through Validus’ direct reinsurance business. The direct
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reinsurance market is a much larger pool – approximately $458 billion (July 2015) of exposures compared to the catastrophe bond
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market which is currently approximately $28 billion (1 July 2015) – which creates more opportunity. This is where the appointment
of AlphaCat is most advantageous to our investors. AlphaCat and Validus are extremely well positioned to source and sift attractive
risks from insurance companies and analyse these risks accurately. One example of this is the Validus Research team, which
consists of 30+ people, including seismologists and weather experts, whose job is to accurately assess the risk of loss from various
events. Rather than paying a manager like Nephila to access risks from direct reinsurance markets, our partnership with
AlphaCat/Validus allows us to access a tailored portfolio of these risks more directly, which may enhance the prospective net of fee
returns to our investors.
The parent company Validus Holdings Ltd is a publically listed company on the New York Stock Exchange with a market
capitalisation of $5.3 billion as at 5 August 2015. AlphaCat’s total assets under management was $2.6 billion (as at 1 July 2015).
The evolution of the insurance-related investments strategy within our portfolios
We have continued to evolve the insurance-related investments strategy within our portfolios, as shown by the following timeline:
2007:
introduced insurance-related investments to our portfolios, as part of a hedge fund structure
2010:
added a segregated catastrophe bond mandate to improve liquidity, transparency and reduce fees
2015:
introduced direct access to specific risks of a direct reinsurance business
What are the new manager allocations?
Table 1 shows the new manager allocations in the insurance-related investments strategy. While the allocations to managers within
insurance-related investments are changing, the portfolios’ allocations to these investments are not changing. We have used
portfolios in the superannuation products for illustrative purposes. New manager allocations will also impact the funds listed in the
Important Information at the end of this document.
Table 1 – Allocations of the portfolios to the insurance-related investments strategy and managers
Manager
Insurance-related investments
strategy (hedged)
Nephila
AlphaCat
MLC
MySuper
MLC Inflation Plus
Conservative*
MLC Inflation Plus
Moderate
MLC Inflation Plus
Assertive
%
(change)
%
(change)
%
(change)
%
(change)
0%
(-2%)
2%
0%
(-2%)
2%
0%
(-2%)
2%
0%
0%
* MLC Inflation Plus Conservative does not currently have an allocation to this strategy
The latest manager allocations for all our portfolios are available on the Fund Profile Tool on mlc.com.au
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Trading Risk (12 September 2015). “Property cat limit expands 8% to reach $352bn” [Press release]. Retrieved from: http://www.tradingrisk.com/property-cat-limit-expands-8-to-reach-352bn Figure has been converted to Australian dollars.
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Guy Carpenter (2 September 2015). “Dynamic Cat Bond Environment in First Half of 2015” [Press release]. Retrieved from
http://www.gccapitalideas.com/2015/09/02/dynamic-cat-bond-environment-in-first-half-of-2015/ Figure has been converted to Australian dollars.
Change in MLC’s insurance-related investments strategy
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Strategy update
Change in MLC’s insurance-related investments strategy
Are there fee implications?
Fees for impacted MLC products will not increase as a result of this strategy change.
Fee impacts are an important consideration in our decisions. To approve a strategy change, we must expect it to benefit clients
after taking into account the impact on fees.
Investment fees are available in the Fund Profile Tool on mlc.com.au and mlcinvestmenttrust.com.au
For further information regarding fees and costs, including definitions, please refer to the relevant product PDS.
Important Information:
This information is provided by MLC Investments Limited (ABN 30 002 641 661 AFSL 230705) and MLC Limited (ABN 90 000 000 402), the latter as
administrator of The Universal Super Scheme (ABN 44 928 361 101), both members of the National Australia Bank group of companies, 105–153
Miller Street, North Sydney 2060.
This document has been prepared for licensed financial advisers only. This document must not be distributed to “retail clients” (as
defined in the Corporations Act 2001 (Cth)) or any other persons.
This information may constitute general advice. It has been prepared without taking account of individual objectives, financial situation or needs and
because of that you should, before acting on the advice, consider the appropriateness of the advice having regard to your personal objectives,
financial situation and needs.
Past performance is not a reliable indicator of future performance. The value of an investment may rise or fall with the changes in the market. The
performance reported is before management fees and taxes, unless otherwise stated.
You should obtain a Product Disclosure Statement or other disclosure document relating to any financial product (for which AlphaCat is a manager)
which is issued by MLC Investments Limited and MLC Nominees Pty Ltd (ABN 93 002 814 959) as trustee of The Universal Super Scheme (ABN 44
928 361 101), and consider it before making any decision about whether to acquire or continue to hold the product. A copy of the Product Disclosure
Statement or other disclosure document is available upon request by phoning the MLC call centre on 132 652 or on our website at mlc.com.au.
An investment in any product offered by a member company of the National Australia Bank group of companies does not represent a deposit with or
a liability of the National Australia Bank Limited (ABN 12 004 044 937) or its subsidiaries.
MLC Investments Limited relies on third parties to provide certain information and is not responsible for its accuracy. MLC Investments Limited is not
liable for any loss arising from person relying on information provided by third parties.
The investment manager is current as at the date this communication was prepared. Investment managers are regularly reviewed and may be
appointed or removed at any time without prior notice to you.
The funds affected by these changes
The following funds are affected by the changes to our insurance-related investments strategy. These funds appear on MLC’s platforms, in addition to
a number of external platforms.
Funds affected:
MLC Inflation Plus – Conservative Portfolio
MLC Wholesale Inflation Plus – Conservative Portfolio
MLC Inflation Plus – Moderate Portfolio
MLC Wholesale Inflation Plus – Moderate Portfolio
MLC Inflation Plus – Assertive Portfolio
MLC Wholesale Inflation Plus – Assertive Portfolio
MLC MySuper
MLC Investments Limited ABN 30 002 641 661 AFSL 230705 and MLC Limited
ABN 90 000 000 402 AFSL 2306964. Part of the National Australia Bank Group
of Companies. An investment with MLC is not a deposit or liability of, and is not
guaranteed by, NAB.
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