Henderson Global Investors manager Luke Newman’s decision to stick with insurance companies that saw shares tumble after chancellor George Osborne’s Budget pensions announcement has come up trumps.
Mr Osborne announced what he described as “revolutionary” changes to the annuity market in the Budget in March.
The chancellor pledged “no one will have to buy an annuity” and introduced significant flexibility for pensions, allowing those with defined-contribution pensions to access “as much or as little of their pension pots as they want, anytime they want” after they retire.
Following the announcement, more than £3bn was wiped off the value of insurance companies – a major part of many UK equity portfolios – as traders panicked that the sales of annuities would collapse.
Specialist annuity companies Just Retirement and Partnership Assurance were badly hit, losing more than half of their market value in the space of a few hours. Other insurance companies, including Legal & General, Aviva, Prudential and Resolution, also lost value.
Henderson UK Absolute Return manager Mr Newman said in spite of this slump in shares after the announcement, he took the view that far from the UK “becoming a nation of Lamborghini pensioners” the vast majority of pensioners’ assets “will remain with insurance companies, within their asset management division or investment platform”.
“Here, these assets may generate higher revenue streams than if they remained in lower-revenue generating annuity asset classes, such as gilts and cash,” Mr Newman said.
“Our long positions in Phoenix (1.3 per cent), Legal & General (2.8 per cent) and Friends Life (2.6 per cent) all contributed positively to fund performance in the third quarter, as markets continued to come around to our way of thinking.”
Elsewhere, the manager said he had started to build long positions in retail banks, as he said concerns about the sector were overdone.
In advance of balance sheet stress tests by the authorities in Europe, Mr Newman said he went “selectively short in liquid UK banking stocks”, which he said “proved to be a profitable trade”.
But in October, “we reversed this with concerns apparently overdone and have started to build long positions in retail banks with strong balance sheets”, he added.
“While a rate rise may be some time off, lenders should be the place to make money due to their interest margins.”
The manager has also built up a position in buy-to-let lender Paragon, which he expected would expand into the residential mortgage space – an area where competition was set to increase.
“Within the residential mortgage market, the UK’s FCA is encouraging new lenders to enter the market,” he said.
“These ‘challenger banks’ are coming from a standing start, with a smaller book of legacy ‘bad loans’ on their balance sheets. They are poised to extend their market share if stricter-than-anticipated stress tests cause the UK’s incumbent mortgage lenders, such as building societies, to withdraw from the market.”
