Manager video update – September 2018

The US market’s record run, opportunities in defensives, and how sustainability and growth go hand in hand. Head of Income Mark Whitehead on the latest investment themes.

21 September 2018

A record run for markets

  • The US market’s bull-run officially became the longest on record in August.
  • This milestone had been keenly anticipated by investors for much of the year, but many are already looking for signs that we are approaching the end of this economic cycle.
  • I certainly believe we are moving into a market environment where greater discernment is needed, which suits our long-term, high-quality approach.

Resilience to market swings

  • Over the course of the year, we have increased our exposure to defensive companies, in anticipation of a change in market leadership.
  • We recently invested in Zurich Insurance.
  • Non-life insurance companies, which make up the majority of Zurich’s business, are characterised by a lower sensitivity to the market, yet benefit from rising interest rates. This makes them notably different to so-called defensive ‘bond proxies’.
  • Zurich has a strong and resilient solvency position, with additional earnings upside from self-help opportunities.
  • Insurance premiums are positively geared to inflation, supporting our objective of real income growth. Our knowledge of this company and meetings with management reinforced our view of its ability to improve underwriting and reduce expenses; two potential drivers with low macro-dependence that we believe are underappreciated by the market.

Tapping into secular themes

  • A key quality measure for us is the effectiveness of companies’ ESG practices. These are critical to sustaining business growth and driving investor returns.
  • Dutch firm DSM, held in the portfolio, has once again been recognised for its sustainability credentials, being named for a third-year running in Fortune’s Change the World list.
  • In fact, sustainability is itself a growth driver for DSM. ESG themes, such as the move to a more sustainable way of living, are closely aligned with its focus on nutrition and health, as it capitalises on the structural growth opportunities in changing global dietary patterns.
  • In this way, being sustainable allows the company to create value, not just for shareholders, but for customers, employees and society at large.