With equity markets selling off again in March and risk-free rates declining once more, discovering any asset class with positive returns and a low default rate could be of interest to institutional investors.
The Trade Finance: A Promising New Asset Class for Institutional Investors report produced by Greenwich Associates on behalf of EFA Group, points out that trade finance offers the possibility of between 3.5% and 5% net returns.
Does that compensate for the risk? The ICC Trade Register 2017 finds that between 2008 and 2016 the default rate on import letters of credit stood at 0.38%, and on export letters of credit at just 0.05%.
While some institutional investors are already looking at trade finance, the market is now ripe for development.
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| Deep Singh, EFA Group |
Deep Singh, head of investments at EFA Group, says: “While the asset class is relatively small, it has been around for about 15 years now and has evolved over the last few years. There are now more than 20 viable asset managers for institutional investors to consider.
"Their collective assets under management has grown from under $5 billion in 2015 to more than $7 billion.”