“Insurance,” according to a 2020 Morningstar report, “is one of life’s necessities that people grudgingly pay for, and investors usually don’t get too excited about the sector, except as an income play.”
But Scott Berg, T Rowe Price portfolio manager, has flipped the traditional view of insurance as a low-growth backwater, suitable for value enthusiasts only, on its head.
“Insurance,” Berg said, “is growth now.”
The renowned T Rowe portfolio manager in charge of the flagship US$570 million Global Growth Equity Fund said in an era of structurally higher interest rates and rising premiums, insurance companies are on a multi-year tear.
Presenting at the Harbour Asset Management investment conference in Wellington last week, Berg name-checked three insurance companies – Chubb, Hannover Re and MetLife – as key components of the fund’s overweight position in financial stocks.
In fact, financials marks the largest above-benchmark weighting in the Global Growth holdings in a group that includes banks (from both developed and emerging economies), payments firms, capital markets as well as insurance.
The fund, which is offered as a portfolio investment entity by Harbour in NZ, also has small overweights in industrials/business services, materials and communications services.
Berg told the Harbour crowd that the portfolio weights reflect a ‘broadening’ in market performance beyond the ‘magnificent 7’ that have dominated the previous year or so on artificial investment (AI) hopes.
He said while the ‘mag 7’ stocks may have justified valuations with year-on-year earnings growth, the pace of revenue expansion of the super-tech set will likely slow to a still-healthy high-teens to low-20s percentage points.
“At the same time, the rest of the market should see earnings growth go from zero to 10 per cent,” Berg said.
While not immune to the mag 7 or AI charms (the fund is overweight Meta, Amazon and Microsoft, for example), he said the portfolio is positioned for stronger growth outside the US.
Emerging markets (EM), in particular, offer solid opportunities for growth-oriented investors, Berg said, pushed along by four tailwinds: easing monetary conditions coupled with fiscal prudence; ‘macro drivers’ including less-entrenched inflation; improving demographics; and, more attractive valuations.
Investors have “under allocated to EM equities after years of moribund flows”, he said.
“A reversion to the 20-year average allocation of 8.4% would represent inflows of approximately US$910 billion, or about 58% of current EM assets under management.”
EM economic and stock factors are under-represented in global yardsticks, Berg said, leaving index-based investors missing out on exposure to future growth.
Of the 10 largest single stock overweights in the T Rowe growth fund, four are listed in emerging economies including Indonesian retail distributor, Sumber Alfaria Trijaya, and the Vietnamese conglomerate, FPT Corp.
The fund also has almost twice the exposure to EM companies as its index (the MSCI All World ex Australia) with about 23 per cent of the portfolio invested in the sector – despite remaining wary of China.
“Emerging markets represent 40 per cent of global GDP and 60 per cent of the world’s economic growth,” Berg said.
After three years of underperforming its benchmark, including a particularly rough 2021 and 2022, the T Rowe growth fund ended almost 2 per cent ahead of the index net of fees over the nine months to the end of September.
But while an “immaculate soft landing” in the US is now in view, Berg said investors should be prepared for further volatility amid rising geopolitical risks, potential earnings disappointments and entrenched higher long-term rates – also possibly highlighting the value of insurance.
Harbour manages about $450 million in T Rowe PIEs including $70 million-odd in a hedged version of the strategy.
As at the end of September, the US-listed T Rowe Price reported total assets under management of US$1.6 trillion.