Steve Peacher: Hi everybody, this is Steve Peacher, head of SLC Management thanks for dialing in to this episode and today I’ve got Tom Murphy with me. Tom heads our institutional business, Tom thanks for taking a few minutes.
Tom Murphy: Thanks Steve.
Steve Peacher: I know that your team spends a lot of time with a variety of different types of institutional investors and as we start the New Year and you think back on 2021, is there a primary theme, a dominant theme, that really jumps out at you when you think about the challenges that those clients and their consultants, are trying to address?
Tom Murphy: And yeah thanks for that question Steve. I know that I’m previous podcasts you've discussed and inflation concerns and also the impact of low yields and they remain major issues for our clients. And maybe one other topic that stands out has been the number of conversations were having with clients on further diversifying their portfolios. Particularly as yields are so low and equity markets continue to test all time highs. And for DB plans, as de-risking continues to take place, many plan sponsors now have quite substantial concentrated public fixed income portfolios and so they're looking for alternative sources of credit. For insurers, they're also seeking additional diversification and the good news is that the regulatory capital rules reward enhance portfolio diversification, so certain asset classes seem much more attractive within an overall portfolio context and they might do on a standalone basis. So given this we're seeing insurers steadily increase their alternatives exposure, specifically into real assets some private credit and those assets provide long term sources of income, but they also provide great diversification from equities, and so it's a real win/win for many insurance companies.
Steve Peacher: As the institutional investors, insurance company owners, look to further diversify, have you seen that lead to flows in any particular asset class or any particular sector?
Tom Murphy: Yeah, I suppose historically many investors have looked at the world in a very black and white way, like growth versus hedging assets or more sophisticated equities versus fixed income. We're actually seeing significant flows into asset classes and structures that sit at the intersection of those two buckets. So, again, looking at DB plans, they're increasingly allocating to investment grade private credit. It offers hedging characteristics similar to traditional fixed income, while also providing additional yield and importantly name diversification from issuers that aren't available in the public markets. Similarly, we've seen them interested in other credit diversifies like long data securitized. Turning back to insurers, assets like infrastructure and real estate bring significant diversification benefits. Like I said earlier in isolation these asset classes look like they've got a high capital charge, but when viewed in an overall portfolio context insurers can receive a considerable reduction in the capital charge because of the diversification benefits that they bring. So let me give you a tangible example, we recently spoke to an insurance client about an investment in infrastructure. Their initial reaction was that that kind of investment would attract a 30% capital charge, when in reality, because of the diversification benefits the actual capital charge was much closer to 10%. So this had a really material impact on the net of capital return, and also on their appetite for asset classes like this, which increase substantially as a result.
Steve Peacher: Achieving those diversification benefits is a lot easier if you're a very large investor, a very large insurance company, for instance. It's a lot tougher for smaller institutions to become as diversified, so how do we think about how do we help those clients have smaller clients that may not have access to some of the alternative asset classes that the largest investors in the marketplace do, how do we help them achieve the same diversification goals?
Tom Murphy: There's definitely some truth in that statement Steve, I would say smaller clients sometimes struggle with the governance arrangements and the internal resources and expertise required to implement and oversee an alternatives program. As many of your listeners will know, also the performance differential between a top quartile and the bottom quartile alternatives manager can be far wider than the equivalent in a traditional asset class and so manager selection and asset diversification are absolutely critical. That said there's an increasing number of efficient ways to access alternatives. A good example is the emergence of multi asset credit funds, which can provide instant diversification for investors. Those funds can cover the full spectrum of public and private credit, including corporate securitized, high yield and also real estate and infrastructure debt. They're a great way for small and mid-sized clients to enhance their yield, diversify their portfolios and benefit from economies of scale inherent in a commingled fund.
Steve Peacher: Those are great answers to something that I know is on the minds of kind of all of our clients, really. But so one final question before we end of a personal nature, when you think of the Christmas holiday what have you most missed about not you know about being in Ireland versus staying back in the States? What's different?
Tom Murphy: That's a sentimental question at this time of year, and so I, what do I miss the most? Obviously, I miss family and friends. I also, I think I miss the atmosphere, so as you walk around downtown Dublin, it's very narrow streets obviously very, very old cobbled streets. And, and they just do it u, really, really well in terms of the lights and the atmospheres is fantastic. And then being Irish and living up to my stereotype, also sitting in a pub with a warm fire on Christmas Eve, with a pint of Guinness is something that I used to enjoy doing and at some stage in the future I’ll do again, but the whole atmosphere around Christmas in Ireland and in Dublin is pretty special.
Steve Peacher: That all sounds really appealing. Well we're excited about the coming year and I appreciate you kicking it off with a few minutes for this podcast. And thank you to everybody for listening to this episode of “Three in Five.”
Tom Murphy: Thank you, Steve.
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