GSAM: Insurers will increase allocation to private corporate debt

More than two fifths of the people making portfolio allocation decisions for insurance companies say they plan to increase their allocations to private corporate debt over the next 12 months, according to a report by Goldman Sachs Asset Management. The number (41 percent) puts private debt at the top of that league table. Another 30 percent say they will maintain their current allocation. Only 4 percent plan to decrease it. (The remainder do not invest in private corporate debt.)

Breaking that down by region: private corporate debt is only the fifth largest prospective allocation increase in Asia. But it is the third largest in EMEA and easily the largest in the Americas.

In a related development, insurers are not shying away from credit risk. Although 12 percent globally said they would decrease their exposure to credit risk over the coming year, 35 percent said they would increase it. In none of the regions was there an expected net decrease of this exposure.

When the allocators were asked to rank the three asset classes that they expected to deliver the highest total returns over the next 12 months, they ranked private equity No. 1 most often (11 percent). But 22 percent ranked private corporate debt among their top three. This surpasses the corresponding figure for private equity (21).

The development coincides with the increase in favor for private assets generally. A majority of respondents (51 percent) said they will increase their allocations to private assets in the year to come. By region: allocation to private assets is most firmly set to increase in Asia, where 61 percent say they will increase, while 39 percent plan to decrease. In EMEA, on the other hand, maintenance is preferred: 47 percent will keep their current allocation, while  a relatively modest 43 percent plan to increase it. The Americas stands between the other two regions in this respect, with 55 percent of respondents saying they will increase this allocation; only 4 percent expect to cut back, while the remainder are opting for maintenance.

GSAM released the findings of its latest survey of the global insurance investment industry on 4 April 2023, after collecting responses from 343 insurance company executives in February. GSAM asked the insurers where they expect to increase/decrease portfolio allocations over the coming 12 months. As noted,  private corporate debt is the favored one.

More than a quarter (28 percent) plan to increase their allocations to infrastructure equity, and the same percentage say they will increase their allocations to infrastructure debt.

Going green

Allocations to green (impact) bonds should increase in the coming months as well. Thirty-seven percent say they will increase this allocation, while  27 percent plan to maintain it. Only 1 percent plan to  decrease this allocation. The remainder have no current allocation in green bonds. But most of the pro-green-bond sentiment comes from EMEA or Asia, not the Americas.

In the Americas, on the other hand, asset-backed securities look to make a major move in the months to come. This is the asset class that is second-most frequently cited for an imminent increase in allocation, by 32 percent, just behind private corporate debt, at 38 percent. ABS’ do not rank high in either Asia or EMEA.

One might ask then: where do these executives believe allocations are ripe to be decreased? There are six asset classes for which the net change is negative (that is, more executives expect their company to decrease its allocations here than to increase them). These assets are, listed from the highest net negative to the lowest: cash and short-term instruments; hedge funds; commercial mortgage-backed securities; cryptocurrencies; high-yield debt; and emerging market corporate debt.

The executives were asked to identify three issues that pose major macroeconomic threats to their company’s investment portfolio. The top three, in order, were: inflation; an economic slowdown/recession in the US; and market volatility. The other less-concerning options ranged from a resurgence of covid to a disastrous cyber event – that is, from one sort of virus to another.

The report cites Maria Vassalou, GSAM’s co-CIO, multi-asset solutions, as saying “deglobalization and the new emerging global economic order are rapidly changing the way we approach investing and present new investment opportunities across a broad range of asset classes, including traditional fixed income which will once again be able to hedge risk assets in addition to providing attractive returns.”