Market Insights

In response to the unprecedented speed of rate hikes and tumbling bond valuations, many investors have turned to GICs for their attractive yields and capital preservation. However, with inflation moderating, we believe investors should consider looking beyond GICs and pivot back to bonds, particularly Active Credit, which can offer higher yields, capital preservation, and portfolio diversification.

Bond markets are extremely attractive from an all-in-yield perspective, and we genuinely believe the current opportunity set in fixed income provides investors with an excellent entry point. Nonetheless, the valuation dispersion across and within asset classes requires a tactical approach to identify and exploit the best risk-adjusted opportunities.

P&C firms face more complex investment decisions than most institutions due to regulatory capital guidelines, but now must re-evaluate their investment playbook in the context of today’s market volatility and weaker macroeconomic outlook. Based on the three P&C investment dimensions: return, risk, and capital charge, we believe P&C insurers can benefit from the relative opportunity in high-quality Active Credit, providing a better risk-reward profile.

There is no denying that the income is back in fixed income. Investors may feel compelled to lock in attractive bond yields by overweighting portfolios to certain securities. However, we believe the still uncertain market backdrop calls for a more balanced approach when constructing a bond portfolio.

In the 2023 Federal Budget released in late-March, a surprising tax measure was proposed, where Canadian insurers will be expected to pay the full tax rate for common and preferred share dividends, treating them as ordinary business income. We believe losing the tax advantage of these instruments gives insurance companies another good reason to rethink their preferred share allocations. We believe actively managed fixed income solutions can deliver better risk-adjusted returns for P&C firms, with a much lower capital requirement.

At RPIA, we believe risk management and hedging are critical elements of corporate credit investing. We seek to understand the varying risks in each underlying portfolio with precision, and then sell or hedge the specific sources of risk if our investors are not being adequately compensated for the cost of bearing them. In this paper, we review how we address explicit and unforeseen risks through our hedging program.