Background

There are few genuine alternatives to property, shares and bonds that produce consistent returns independent of the direction of traditional markets.  In 2009, in the immediate aftermath of the Global Financial Crisis, Brookvine set out to identify a genuine, accessible and liquid source of portfolio diversification.

Challenge

We noted emerging European pension fund investment in insurance-linked securities (ILS) such as catastrophe bonds.  These investments were earning attractive yields, historically at least 5 percent above US government bonds with a similar maturity, and had a low correlation to asset classes like stocks, bonds, hedge funds and commodities.  They were comparatively liquid and we noted a unique characteristic − the source of the risk of loss is independent of the source of return.

Yet few Australian institutions had researched and considered an investment in catastrophe bonds. They are a highly specialised and emerging asset class.  Moreover, this form of diversification had previously been inaccessible to private wealth investors.

Not many fund managers had the requisite skills and experience, and even fewer had Australia in their sights.  We accepted the double challenge of first, finding an excellent partner willing to commit resources to an unknown market, and second, to convince Australian investors about the benefits of investing in this new asset class.

What Brookvine did

Through detailed desk-top research, Brookvine sought to identify pioneers of investing in the asset class.  We cross-checked multiple sources including published research and white papers, media coverage of catastrophes and ILS, conference agendas and speaker notes.  We spoke to market participants, such as reinsurers, and early investors such as European pension funds. We also engaged a specialist reinsurance expert to help us understand the asset class and different means of accessing it.

Dr John Seo and the firm he co-founded, Fermat Capital LLC (Fermat), featured so prominently and consistently in these sources it became clear that the industry held Fermat and its people in very high regard.  They were amongst the pioneers of investment in the asset class.  Brookvine approached Fermat and initiated what would become a long-standing partnership.

Fermat and Brookvine agreed to partner in late 2009, and by March 2010 had prepared detailed due diligence information and marketing collateral ready for John Seo’s first marketing trip to Australia to introduce Australian investors to this then relatively unknown opportunity.

For many Australian investors, the related risks were concerning.  Many were worried that in the event that a natural disaster covered by a bond occurs, investors will be faced with serious losses.  We tackled that concern by creating a proper understanding of what is a complex and specialised area.  We were able to demonstrate that the premium received is far greater than is warranted by the risk, and the risk of loss is not influenced by volatility in financial markets.

The Outcome

In mid-2011 Brookvine successfully secured the first Australasian mandate for Fermat and the following year seeded the commingled Fermat ILS Yield Fund.  Today Fermat manages nearly $600 million on behalf of institutional and high net worth investors in Australia and New Zealand.

In so doing the senior Fermat team, including John Seo and Brett Houghton, have established close ties with their Australian and New Zealand investors, and Brookvine is widely regarded for the quality of its advocacy for the asset class.

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1. S&P/ASX200 Accumulation Index from November 2001 to June 2017. Return to the reference

2. Bloomberg AusBond Bank Bill Index, formerly called the UBSWA Bank Bill Index until Bloomberg acquired the UBS Australia Bond Index Family in 2014. Return to the reference