Strategies for equity insurance portfolio management
Stéphanie Faibis, Head of Equity Insurance Management, and Olivier Lefevre, Head of Equity Research, outline the strategies adopted across equity insurance portfolio management.
- Equity investment opportunities are still very much on the cards in 2021, and are driven by secular growth trends that we particularly seek out in our equity insurance management i.e. globalized economy, positive economy, innovation economy.
- With valuations poised to normalize, expected earnings set to recover and various supporting factors for the European equity markets, we are seeing a positive combination of factors for investing in the stock-markets in 2021.
- We continue to take a selective approach, as we draw on our extensive insight into European companies.
- Strategies for equity insurance portfolio management
Taking the long view on corporates
Equity insurance portfolio management takes a long-term investment approach, with our investment criteria built on fundamental financial and non-financial considerations, as we seek out companies that are sustainable over the long term and display responsible behavior.
Quality and sustainability
Equity insurance management takes a long view on companies, and our investment approach is built on fundamental and qualitative analysis, as we focus on both the quality and sustainability of companies’ business models.
We have a preference for companies that keep a handle on their price environment and display true pricing power. We welcome experienced management teams with a convincing strategic vision and tried-and-tested execution capabilities. Meanwhile, our take on quality also includes a solid balance sheet and sustainable cashflow generation.
Additionally, we systematically take on board ESG dimensions – Environment, Social, Governance – in our fundamental analysis. We monitor governance practices particularly closely to ensure that effective counterweights are in place alongside top management on the one hand, and to ward off reputational risks on the other. With these goals in mind, we scrutinize all resolutions put to the vote at shareholder meetings and exercise our vote on each of them. Issuers subsequently receive a summary in our yearly report.
We base our strategies for equity insurance management on secular growth themes such as the globalized economy, positive economy and innovation economy, all of which can be applied to both sectors and geographies. These secular growth themes are buoyed by current and future digital, social and environmental disruption: the companies that we invest in either initiate these disruptions or benefit indirectly from them as a result of the development of their target market.
Taking this long-term view means we can build our mandates on high-quality stocks with clear visibility on their earnings trends and consequently fairly low asset rotation at around 20%.
We maintained our positions on high-quality securities in 2020, despite the crisis, while also drawing on the market decline from spring onwards. We took out positions on new companies that adapted their business models to tackle the challenges of the moment across varied sectors, ranging from utilities to transport, smart cities and fintechs that are fueled by several disruptions currently under way.
We do not expect a major correction risk on the equity markets – and even less so on our investment themes – over the months ahead. Valuations are admittedly climbing to a peak as compared with past valuations, but corporate profits still stand a far cry from their highs in 2019. Broadly speaking, the equity markets only correct – bar external catalysts – when valuations and profits are stretched at the same point in the cycle, and this is not the scenario at this point.
Our belief is that equity market valuations will not normalize through a share price decline, but rather as a result of a sharp surge in earnings expected for 2021 and 2022. This process is not likely to push market valuations up to their long-term average, as the interest rate environment is very different to past situations. With interest rates close to zero, equity market valuations can only normalize above their past averages.
Looking beyond the unprecedented monetary and fiscal measures taken by both central banks and governments, we can clearly single out three factors underpinning the European equity markets.
- So-called Covid stocks that boast high-quality business models catching up – in the aerospace, mass catering, and specialist retail sectors – as a result of an easing in the pandemic and the uptick in vaccination programs.
- Continued secular growth trends fueled by digital disruption (more connected world, more efficient and digitalized production process), environmental disruption (energy transition, etc.) and social disruption (urbanization, ageing population, etc.).
- The reappearance of excess cash generated by companies with solid balance sheets. Companies with robust balance sheets, low debt and strong cashflow generation have the wherewithal to pay out hefty, sustainable and increasing dividends.
Our top sectors for 2021 are industries that will benefit from the European Green Deal, i.e. the hydrogen theme and utilities. We will also focus on industries set to gain from growth in China – particularly luxury goods –, companies that are undertaking digitalization or that successfully take advantage of the digital transformation via enhanced production site productivity, home working, etc.
Equity insurance investment focus
We have picked out three areas for our investment focus in our equity insurance portfolio management that are set to benefit from the support outlined above.
- Best in Class profile: this involves selecting and investing in only the most efficient companies across all business sectors. This investment diversity through all industries means we can draw on capital gains right throughout the economic cycle. The core selection comprises quality stocks that we have held onto during the crisis, as we even bolstered our positions on certain investments, particularly those that disrupt their sectors. This “standard selection” set-up also includes a number of so-called Covid stocks – in the aerospace, mass catering and specialist retail sectors – that are characterized by solid economic fundamentals and where we were able to add to our positions at reasonable prices as a result of the spring 2020 crisis, locking in the entire process for a return to economic normality post-Covid.
- Quality & visibility profile: this enjoys structural growth trends that have been promoted by the disruptions we outline above. We select quality stocks with robust growth potential and clear cashflow visibility. The selection primarily consists of companies with much stronger organic growth than GDP gains, thereby leading to structurally higher earnings growth than the market as a whole.
- The High Quality Dividend profile: this focuses on companies boasting a visible and sustainable business franchise that is safeguarded from any kind of disruption and generates strong cashflow, on the back of solid margins and an increasing asset rotation rate. Companies selected have sturdy balance sheets with moderate leverage, and hence the ability to pay out hefty – but first and foremost – sustainable and growing dividends. This investment profile therefore generates strong and sustainable financial gains.
Equity investment opportunities are very much on the cards in 2021, and are driven by secular growth trends that we particularly seek out in our equity insurance portfolio management. With valuations poised to normalize, expected earnings set to recover and various supporting factors for the European equity markets, we are seeing a positive combination of factors for investing in the stock-markets in 2021. We continue to take a selective approach, as we draw on our extensive insight into European companies.