Life insurers and annuity providers slumped following the chancellor’s decision to remove the requirement for retirees to purchase those products. However, Clifford says that the stocks are being driven by long-term tailwinds that should see them re-rate in future, and has added to his positions in the out-of favour sector.
“The thematic investment thesis is they will grow on the back of the savings market,” he said. “I think one of the reasons if you look at the issues around the changes to the annuity providers one of the this is the longevity of the assets that will be held.”
“These assets will have a longer life from the point of view of the asset management part of these companies.”
“Auto-enrolment means over time contributions from employers and employees will rise in those areas as well.”
“We have certainly increased our holdings in a number of those, both on the open book side and the closed book side,” he added.
Open book business refers to policies which are still being paid into and closed book to those that are in drawdown.
Clifford says that the big insurers Legal & General and Standard Life Investments should be beneficiaries of this change through their asset management arms.
These larger and diversified businesses have recovered swiftly from the post-budget sell-off, according to data from FE Analytics,
Performance of stocks year to date
Source: FE Analytics
This is despite Standard Life reporting that sales of annuities were down by 50 per cent after the chancellor’s speech.
However, Clifford is also retaining his confidence in the fare harder hit annuity specialists Phoenix and Resolution, which are still some way below their pre-budget prices.
Performance of stocks year to date
Source: FE Analytics
Resolution is down 16.23 per cent since the budget and Phoenix 7.9 per cent.
Phoenix has been hit by concerns over an FCA investigation into the charging structures on closed book business, relating to products sold prior to 1993. Clifford says that this doesn’t concern him.
“It is a company that has gone through an awful lot of scrutiny from the regulator in terms of funds that are with-profits related.”
“The investigation is into companies disproportionately charging legacy business customers through large fees to benefit new customers, but Phoenix doesn’t write new business.”
“Its products are structured so that benefits are shared between policy holders and shareholders.”
“The market hasn’t really been discerning in that regard. There’s an opportunity here based on long term savings growth.”
“The company is trading on a pretty large discount to net asset value,” he added.
Invesco Perpetual Global Opportunities manager Stephen Anness also sees huge opportunity in this sector, although he comes at it from a capital growth rather than income perspective. Anness holds Resolution.
“It looks as though the annuity market will fall significantly in the next few years, but we think there are several mitigating factors,” he said.
“Pensions as savings products will become even more attractive than they are now and a more flexible product therefore there will be more money managed in what’s referred to as the de-accumulation phase.”
“There will still have to be products that give customers some protection and longevity. We think the life insurance industry is the best place to get that.”
“You need to be backed by lots of capital and have adequate risk systems to do this. There are only a handful of companies in the UK with these resources. The industry in the UK will have to adapt.”
Clifford says that he also expects Aberdeen Asset management to benefit from similar dynamics. The stock has been under pressure following outflows at is emerging market business as those regions have suffered, but Clifford says it is another that is being undervalued because of its exposure to the same theme of a growing savings culture.
Aberdeen bought SWIP at the end of last year, but Clifford says the benefits of that deal in diversifying the company’s exposure have since been quickly forgotten by the market.
“We still see the savings market as a tremendous growth opportunity,” Clifford said. “It’s a much more diversified business and the emerging market side of the business should see significant inflows over the next two or three years.”
Performance of stock over 1yr
Source: FE Analytics
Moneysupermarket.com is another undervalued opportunity playing the same theme, Clifford says.
The stock suffered last year as the founder Martin Lewis sold a huge amount of stock as he exited and there was a huge special dividend with an effect on the share price after the payout.
Clifford says the website has also been suffering as searches for savings products have been hit by record low interest rates making most products pointless and indiscernible from one another.
When interest rates rise this trend should reverse and the stock will get a boost, Clifford says.
The £96m Lazard Multi-Cap Income fund was renamed last month from the Lazard UK Equity income fund.
However, the mandate has not changed, and Clifford says the change was made because investors were overlooking the multicap nature of the product.
Data from FE Analytics shows it has outperformed the average fund over three years, returning 38.11 per cent.
Performance of fund vs sector and index over 3yrs
Source: FE Analytics
Clifford explains that it is a genuine multi-cap product, which retains 60 to 70 per cent in the FTSE 100 at all times. The fund has ongoing charges of 0.84 per cent.
