Insurance is an area we all end up spending more time researching than I’m sure we’d like – both for our clients and for our ourselves.
With the help of Sergei the Meerkat and Brian the Robot we trawl through pages of home, car, holiday and life insurance on a regular basis.
We insure against bad things happening, and in a way, you can look at an investment in the insurance sector in the same way. It is, after all, a must-have product for individuals and companies alike. As long as there is risk in the world, insurance will be bought.
Unlike most other areas of the market, valuations of insurance companies tend to stay sensible and are rarely too expensive or too cheap.
So the sector marches to a different drumbeat to the rest of the market, which makes it a good defensive investment and diversification tool within a wider portfolio. If you want cautious equities, it fits the bill.
Insurance companies also tend to produce a good overall yield – a yield that comes from both dividends and share buybacks – so total returns get a great boost. It’s long-term compounding at its best, and another option for income-hungry clients.
My favourite fund in this sector is Polar Capital Global Insurance. For starters, its fortune doesn’t depend on the whims of mother nature – it has a little bit of catastrophe insurance, but not much.
And rather than looking at the big insurers that we are all familiar with for our everyday insurance needs, the managers of this fund concentrate on the underwriting companies and niche players that have something different to offer.
The fund has a natural bias towards smaller and medium-sized companies listed in the US, Bermuda and London, as they are particularly keyed in to these markets.
They also prefer company management to have a stake in the business, so their interests are aligned with their shareholders.
The bias towards the US and Bermuda also means this fund can be, and often is, used as the ‘dollar bucket’ in a wider portfolio.
There are usually around 30 to 35 stocks in the fund, so it really is investing in just their very best ideas. The managers run a ‘watch list’ of around the same number – ready alternatives should they decide to sell a company.
The turnover is pretty low, however, as, in their words, the dispersion of quality is vast in this sector – good companies tend to stay that way and the bad ones go bust. So they typically change just two or three companies each year.
Even a possible Brexit, which may weigh heavily on London-based stocks in the coming weeks, should have little impact on the sector.
Most insurance business is placed locally, where companies have people on the ground. If the risk is complicated, then they go to the big global companies like Lloyd’s of London, as the deals they tend to underwrite need their technical knowledge and expertise.
This would still be the case if the UK left the EU, as evidenced by the fact that a lot of European-wide business is now done in Switzerland.
So insurance isn’t just about meerkats and robots. It’s so much more – yield, diversification, cautious equity and dollar calls. That’s quite a useful tool in your investment box.
Darius McDermott is managing director of FundCalibre
