Following the trend of the past few years, 2022 has been full of surprises, with fluctuating social, political and economic conditions creating an environment that requires extra attentiveness and flexibility to respond to unexpected opportunities and trends. While higher return opportunities and a strong private market pipeline led investors to increase real asset allocations in 2021, several factors have prompted a pullback in traditional private market investment allocations for 2022.
With more than 30 years of experience in insurance investment accounting, we have identified some key insights relative to balance sheet risk for an insurance investment portfolio, which translate to four investment strategies for today’s rising interest rate environment.
Floating Rate Bank Loans—Less risky allocations like bank loans can be more defensible in uncertain conditions, particularly in stable sectors like healthcare. The bank loan market is now almost as big as the high-yield market.
Special Situations and Distressed Debt—Direct lending is viewed as a safe investment during extreme volatility, offering high rates of return even during an economic downturn.
Swaptions, Currency Swaps, Cap and Floor Strategies—As interest rate differentials widen, cross-currency swaps may shield portfolios from interest rate volatility.
Infrastructure and Natural Resources—While traditional commercial real estate investments have struggled in the wake of the COVID-19 pandemic, infrastructure and natural resource investments like energy and agriculture may offer protection against inflation and other disruptions.