Schroders' emerging market debt expert Christopher Wyke Photo by Mark Tatem

How to make a decent return on fixed-income investments is likely to be a challenge for Bermuda's re/insurers in 2010.

That is the view of Christopher Wyke, of asset management firm Schroders, who believes that emerging markets debt (EMD) could be part of the solution.

Mr. Wyke, who is Schroders' EMD, currencies and commodities product manager, has been in talks with insurance bosses this week on a visit to Bermuda, looking to drum up business.

His message is that Schroders EMD Absolute Return Fund offers low volatility, a good record on capital preservation and significantly better returns than US Treasury bonds.

The property and casualty reinsurers in the Bermuda market have traditionally invested their huge pools of capital conservatively, with low exposure to riskier assets like equities.

Stung by massive investment losses amid the turmoil of 2008, Bermuda's insurance companies generally became even more risk averse with their investments last year.

Low interest rates have meant low returns on "safe" investments such as US Treasury bonds and cash has yielded virtually nothing.

In an interview with The Royal Gazette, Mr. Wyke said he believed the insurers' money managers should be looking at EMD, bonds issued by developing economies, largely situated in Asia, Latin America, Eastern Europe, the Middle East and Africa.

"The challenge for insurance companies is: 'What do you invest in in 2010?'," Mr. Wyke said.

"The traditional default is US Treasurys and the outlook for them is pretty poor. Issuance is at record levels and yields are pretty low."

Schroders expects inflation to kick in during the next few years with the US dollar likely to depreciate against other currencies. The US has a huge trade deficit, which gives the Americans incentive to encourage a fall in the dollar's value fall, a scenario with little domestic political downside, according to Mr. Wyke.

US corporate bonds provided good yields last year, because of wide spreads, but those spreads had now narrowed.

The Schroders EMD Absolute Return Fund has some $6.3 billion in assets under management and has posted a negative return in only one year out of 15 — minus 0.3 percent in 2008. Geoff Blanning took over as Schroders head of EMD in 1998 and since December of that year, the fund has achieved an annualised return of 12.8 percent.

Four managers, each specialising in a different region of the world, run the fund and Mr. Wyke said they have great flexibility in their pursuit of opportunities.

"They have 52 countries to choose from and three sectors in each country — external debt, local debt and currencies," he said. "At any one time, the fund is invested in 18 to 25 countries.

"The average credit quality of the fund over the past 15 years has been A-. We invest mainly in sovereign debt, very little corporate debt and no derivatives or structured products.

"Many insurance companies around the world have invested in this product. All we are saying is that the need to diversify away from US Treasurys is greater than ever."

Schroders has a staff of 50, led by David Burns, in its Front Street offices in Bermuda.

"Schroders' presence on the Island is considerable, but its impact on the insurance industry has not been as great as others," Mr. Wyke said.

"That's because it was not a significant fixed-income house — but now it is. In 2009, we saw record inflows into fixed-income products. We now have an insurance asset management unit in London. Our long-term aim is to drive our insurance business."

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