Emma Wall: Hello and welcome to the Morningstar Series, Ask the Expert. I'm Emma Wall and I'm joined today by Morningstar fund analyst, Sam Meakin.
Hi, Sam.
Sam Meakin: Hi, Emma.
Wall: So financials have been in the news a lot recently. They have been blamed for dragging down European's top markets in general because there are some concerns about high-street banks and their balance sheets. However, it's worth remembering that the financial sector is quite a diverse sector and that actually although there are some bad banks with bad loans on their books, there are some opportunities for investors within there, in particular with the insurers.
Meakin: That's right. I can't tar all of the financial stocks with the same brush. And as you say, insurance companies generally tend to be a bit less volatile than the banks as you say, partly due to the sort of visibility that you get through in terms of their underlying books of business.
Wall: There is a fund that we rate here at Morningstar, which offers investors exposure to these niche market. I believe we rate it silver.
Meakin: That's right. It's the Polar Capital Global Insurance Fund is Rated Silver. And another point that – to the volatility point we were just mentioning, this fund focuses on high quality firms with strong management teams looking to grow the book value sensibly. So that also helps it to mitigate volatility there.
Wall: Why do we like this fund, rather than as you just say the fact that since from the stand of it seems to be focusing on quality?
Meakin: That's right. I mean the management teams – the focus on company management teams is important here. The manager Nick Martin, he is looking to assess the discipline of those management teams with respect to only writing new business when it's profitable as opposed to those teams that might go out and just seek to grow book value whenever possible.
Wall: Perhaps you could tell me a little bit more about the portfolio, the underlying stocks which make up the fund.
Meakin: Sure. I mean a lot of thought goes into the portfolio construction on this fund. Martin is looking to understand the nature of the book of the underwriting business of these firms and what sort of exposure he is taking if he is going to invest in that particular company, and how that fits in with the overall dynamic of the portfolio and how it helps diversify the portfolio.
So that means that there would tend to be a mid-cap bias in the portfolio because he is seeking exposures to specific areas of the market rather than investing in this sort of the broader coverage provided by the bigger conglomerate insurers. That means he also tends to be underweight European insurers because the market there is dominated by those larger conglomerate names. So consequently, there is an overweight to North America as well.
On the emerging market sides, exposure tends to be generally only through the insurance brokers and that speaks to the sort of the quality criteria that he is looking for as well, because he tends to have concerns about the profitability of emerging markets insurers; whereas with the brokers, you are just taking the commission and that's he doesn't have to concern himself about that profitability.
Wall: How has the fund performed?
Meakin: It has performed very well over the years, remarkable consistency. And again, speaking to the quality aspects of it, in 2011 that focus really helped the fund that it finished the year broadly flat in absolute performance terms, but that's a lot better than the broader financials funds in that year, which was down – the category average fund was down about 20% in that year. Those funds really suffered from exposure to banks as we were discussing earlier and also the life insurance companies where this fund historically has tended to have a lot of exposure.
Wall: And, of course, that's no mean feat, is it, to not lose any money in a tough market, because it's worth remembering, if you lose 50% in one year, you have to make up 100% to get back to where you were.
Meakin: That's right. And it's also worth mentioning, in this case, for investors that are seeking this sort of specific exposure that this fund really, given that it's focused on the single industry, should only play a small role as part of broader portfolio that's diversified across the economic sectors.
Wall: Definitely, a satellite holding then.
Meakin: That's right.
Wall: Sam, thank you very much.
Meakin: Thanks Emma.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
