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The insurance sector is one of those specialist areas of the market that often goes under-the-radar, yet it has the capacity to deliver impressive and consistent performance.
It is rare to find a fund that can generate strong long-term returns without experiencing excessive volatility, but Polar Capital Global Insurance certainly fits the bill. Over the ten years to the end of December it has achieved a cumulative gain of 321% with the only negative year being 2009 when it lost just 2.4%.
Insurance is not as widely covered as some of the other sectors, possibly because of its complexity, yet it tends to have a relatively low correlation with the broader equity market and isn’t dependent on the wider economy or level of economic growth. This means that historically it has offered defensive characteristics in challenging financial conditions.
Skin in the game
Manager Nick Martin invests in a concentrated portfolio of 30 to 35 quality insurers that can produce sustainable underwriting profits. He and his team of sector specialists look for companies where the managers have a significant stake in the business via material share ownership.
This ‘skin in the game’ characteristic is also true of Polar Capital itself where 30% of the firm’s equity is currently held by directors, founders and employees.
Martin and his team do all their own analysis and research including meeting the companies’ managers. They rarely invest much in life assurers as they prefer specialist non-life companies and those in the casualty and risk sectors.
It is a sensible strategy that concentrates on well-run, proven insurance companies that have high returns on equity and good underwriting records. Since the fund was launched in 1998 – it was originally the Hiscox Insurance Portfolio fund − it has produced an impressive annualised return of 16.2%.
Annual double-digit growth
In his latest update the manager says that the medium to long-term returns of the fund will be very close to the book-value growth of the companies in the portfolio and he is expecting annual double-digit increases.
This growth in book value is driven by a number of different factors including investment returns, underwriting margins and premium leverage, as the insurers find more good business to underwrite as a result of the improvement in market conditions.
The fund has recently been added to the Hawksmoor Global Opportunities multi-manager portfolio. This is because the insurance pricing environment has been steadily improving and the trend is expected to continue this year, which should enhance the fundamental support for the underlying holdings.
Polar Capital Global Insurance has an Elite Rating from FundCalibre and has recently been highlighted as one of their five funds for 2020. It is not a shoot-the-lights-out type of option, but is capable of delivering good returns even if the broader market struggles. The £1.5bn fund has an historic yield of 1.55% and ongoing charges of 1.37% for the GBP Class R share class.