SOUTHAMPTON, Bermuda—”Stress testing” a captive's investment portfolio regularly can help prevent unfortunate surprises, according to a group of investment experts.

Speaking at the annual Bermuda Captive Conference last month, Joseph LoPorto, vp and relationship manager at Brown Bros. Harriman Insurance Asset Management in New York, said, “Stress testing is really a bit more art than science.”

“The objective is really to test the robustness of our strategy,” he said.

Mr. LoPorto said that when Brown Bros. Harriman does stress testing on behalf of clients, the emphasis is on determining the robustness of the client's investment strategy.

In the fixed-income portion of portfolios, there are two primary sources of investment risk associated with bond investments, he noted: interest rates and credit defaults.

“We would tend to think of interest-rate risk as the primary risk when investing in bonds,” Mr. LoPorto said. “So the question is really, "How risky are bonds?' and the answer—particularly in the case of captives—is, "How risky do you want them to be?'”

A captive's portfolio should be structured around the business purpose of the captive and focus on matching appropriate assets to the captive's liabilities, Mr. LoPorto said.

“That strategy of immunizing surplus against interest-rate risk is critical,” he said, adding that it's essential to consider whether expected returns are reasonable relative to the captive's business strategy.

From the standpoint of equity investments, “I think what we're really talking about is volatility testing,” said David Burns, CEO of Schroders (Bermuda) Ltd. and another member of the panel.

Jeff Johnson, senior investment analyst at Valley Forge, Pa.-based Vanguard Group Inc., stressed the value of portfolio diversity, with actively and passively managed assets.

“From the standpoint of a mutual fund, stress testing is as much a qualitative exercise as it is a quantitative one,” Mr. Johnson said.

He said Vanguard believes keys to investment funds' success include selecting talented investment managers and providing rigorous oversight.

Speaking with regard to the cash portion of investment portfolios, Kevin Gardiner, head of global investment strategy at Barclays Wealth, a unit of Barclays Bank P.L.C., in London said, “The stress test to end them all...was living through 2008 and 2009.”

In many cases, investors for the first time found themselves forced to worry about counterparty risks in the cash portion of their portfolios, as well as risks such as deflation and illiquidity, Mr. Gardiner said.

“Our view going forward is that these sorts of risks very, very slowly are going to be moving into the rearview mirror,” he said.

Looking forward, stresses facing money market assets are relatively modest, so captive investors should be able to find high-quality, low-duration alternatives to cash, Mr. Gardiner said.

In another presentation later in the conference, Mr. Gardiner discussed the condition of the capital markets “after a tumultuous decade.”

While many describe good times as an embarrassment of riches, Mr. Gardiner said, “I think for deregulated capital markets, what we've had this past decade is a richness of embarrassments.”

“Deregulated capital markets have fostered seemingly arbitrary gyrations in asset prices,” he said. “I don't think accountants and regulators will get off scot-free in the history books.”

“The regulatory and accounting framework didn't always help in the way it was intended to,” he said.

Going forward, savings products will get simpler and there will be a greater emphasis on liquidity, Mr. Gardiner said.

In addition, he said there's no reason not to expect global business growth.

“We know that there are obvious risks out there,” though Mr. Gardiner said he doesn't expect calamities such as the collapse of the euro or the global geopolitical situation to blow up.

In his short-term tactical investment view, “Equities are preferred to bonds and bonds to cash,” Mr. Gardiner said, adding that companies look more attractive than governments. “We actually prefer the developed markets to the emerging world,” he added.

While preferring company to government investments, Mr. Gardiner stressed that he doesn't expect the “eurozone” to come apart, despite the economic stresses faced recently by some of its participating countries.

“If you're skeptical about the eurozone, by all means, sell the euro.” But, Mr. Gardiner said, it's important to recognize that the forces holding the eurozone together are political rather than economic.

“The single currency's existence isn't in doubt, but its value is,” Mr. Gardiner said. “It's not our favorite currency” and he said he expects the euro to trend lower.