In his valedictory speech, former European Central Bank president Mario Draghi painted a gloomy picture of the eurozone economy and warned that the ECB would be bound to low interest rates for the foreseeable future. He noted that the latest economic data has confirmed the central bank’s assessment of protracted weakness in the euro area’s growth dynamics, the persistence of downside risk, and muted inflationary pressure.

Low interest rates may be good for borrowers, but for savers, it means more months and years of the unfruitful environment that they have endured for much of the past decade. Previously low-risk investment options, such as government bonds, no longer beat inflation – so what solutions do investors have?

Risk and return

The main option is to seek assets offering higher returns, even if they entail more risk. Certainly this has helped income investors, who can turn instead to stock dividends. At the end of October, the Eurostoxx 50 index offered a 12-month dividend yield of 4.2%, compared with a yield of -0.34% on Germany’s 10-year government bond.

But equities present their own challenges, with stock market performance recently generated by a small number of high-growth companies – expensive stocks in a restricted number of sectors, representing a risky strategy heading into a weaker phase of the economic cycle.

In this market environment, diversification into a variety of asset classes is extremely important, and open architecture solutions offer a ‘best of the best’ approach, enabling investors to add a range of alternative assets – infrastructure, absolute return funds, private equity or property – alongside stocks and bonds in their portfolios.

Spanning the economic cycle

A key advantage of open architecture solutions is their flexibility – the ability to adjust the balance of an investor’s portfolio when market conditions warrant. However, the principal idea of diversification is to ensure that the portfolio contains assets that will perform strongly at different stages of the economic cycle, and will not rise or fall in value together.

Luxembourg’s financial services industry and its dominant role in the European fund industry mean providers of wealth solutions have a rich choice of assets and strategies at their disposal. For insurance-based solutions, investors already have access to traditional investment funds, along with internal collective and dedicated funds.

A new addition to the toolkit is Specialised Insurance Funds (SIF), designed to offer a maximum of customisation and flexibility for clients’ investment portfolios, which can be structured on an advisory or buy-and-hold basis, and with a free choice of depositary. With this new solution, the policyholder may directly select from a wide range of assets.

Buy & Hold or Advisory?

OneLife’s Buy & Hold Specialised Insurance Fund offers a solution for clients who wish to access to a diversified range of investment types, including bonds, structured funds, unlisted securities, private equity funds and real estate, without active management.

By contrast, the SIF Advisory offers a choice of exchange-traded and traditional funds, with more flexibility in the assets management. With OneLife’s SIF Advisory solution, the policyholder remains the one selecting the assets while benefiting from the advice of a financial advisor.

In today’s complex times for investors, the diversification and flexibility offered by open architecture options are essential elements in the investor’s toolkit.

Key takeaways

– The low interest rate environment raises challenges for long-term investors, in which there’s no perfect investment solution.

– Open architecture solutions offer diversification and flexibility – an investor’s strongest weapons.

– Luxembourg’s Specialised Insurance Funds offer a new addition to the toolkit for international investors.