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Franklin Templeton Investment Solutions, the more hedge fund focused part of the global asset manager, has maintained its strongly overweight conviction on the catastrophe bond asset class, finding their returns still appealing for investors despite generally lower yields than two years ago.

In fact, the firm continues to place catastrophe bonds second in its list of hedge fund strategy assets, on a conviction basis, with its K2 Investment Management outlook scores only slightly down on the second-quarter at this time.

It’s worth noting that Franklin Templeton has begun to move away from the K2 Advisors name for its hedge fund unit, hence its reports focused on the sector now coming under Franklin Templeton Investment Solutions .

The investment manager commented on the active period of catastrophe bond issuance and the records set at the half-year, which you can read more about in our latest quarterly cat bond market report.

But Franklin Templeton also notes in its commentary that, “Meanwhile, the yield of cat bonds, including combined spread and base rate, remains above 10% in US dollars.”

Remember you can track the yield of the catastrophe bond market over time in our chart here.

Despite the decline seen, Franklin Templeton explained, “Although the yield has declined from its peak in June 2023, cat bond investments continue to be considered attractive for investors seeking to enhance their portfolios with an appealing risk-adjusted return and diversification through their unique and less correlated profile.”

So the manager still sees the cat bond asset class as appealing both from a risk-return standpoint, as well as for the diversification benefits they can offer to investors portfolios.

Which has led Franklin Templeton to place cat bonds at the second highest place of its conviction scores for the third-quarter of 2025, just slightly behind discretionary assets.

The recommendation is still to strongly overweight cat bonds at this time, while for all other insurance-linked securities (ILS) an overweight stance is taken.

For cat bonds, Franklin Templeton’s conviction focused z-score has declined since the second-quarter though, when it gave these assets 1.9.

Now, the z-score stands at 1.3, so lower, but still well into the over weight ranking, which begins at a z-score of 1 or higher.

Franklin Templeton has now bundled all other ILS instruments together, which means we cannot see a conviction for individual components of the asset class such as retrocessional reinsurance, private ILS, or life any more.

As a result, the conviction score for all other ILS now stands at a z-score of 0.8, which is still overweight, but now what was a very strong 2.2 for retro investments in Q2 is seemingly masked by the merging with other forms of ILS where Franklin Templeton had underweight conviction (such as life ILS).

Across all ILS assets as a group (so cat bonds and then “other ILS”), the conviction is now strongly overweight, instead of just overweight, but that’s due to the firm bundling other ILS together and no longer giving specific convection ratings for the other sub-segments, meaning it is catastrophe bonds that are the driver.

Also of note, Franklin Templeton explains how the current macro environment is driving the need for investors to look for diversification.

The manager commented, “For hedge fund investors and managers, this environment presents both meaningful opportunity and heightened risk. The tails to both the upside and downside are expected to be fatter than previously experienced over the last five years. We expect to see greater divergence in manager performance—even within the same sector—driven by increased volatility. In our view, success in this environment will require portfolios that are diversified, liquid, opportunistic and patient.”

Diversified and liquid fits catastrophe bonds, while the ILS asset class is also an area of alternatives where investors need to be patient, plus opportunism can lead to incremental return opportunities in the sector as well.

So Franklin Templeton’s advice for how investors can navigate macro uncertainty speaks to catastrophe bonds and ILS being a good investment option.

Franklin Templeton stays strongly overweight cat bonds, as risk-adjusted returns appealing was published by: www.Artemis.bm
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