Beyond the Headlines

Broad sector performance—whether upward or downward—often obscures individual opportunities lingering beneath the surface. As bottom-up stock pickers, we specialize in identifying these businesses, uncovering those we believe are mispriced and/or overlooked. Currently, two sectors where we’re finding these opportunities are financials and health care.

While the financial sector as a whole benefits from resilient economic data and rising interest rates, not all companies in this sector are poised to capitalize on these trends. On the flip side, health care is grappling with shifting investor sentiment and political uncertainty, but beneath these headwinds, we see businesses with strong fundamentals.

In both sectors, our deep expertise allows us to look past broad trends and zero in on companies with solid balance sheets, consistent cash flows, and attractive valuations. We believe this focused, selective approach is one of the most reliable ways to generate alpha in today’s market.

Banks: Not All Are Created Equal

The tide does not raise all boats. While the current economic background may be generally supportive of financials, not all are on equal footing. The macroeconomic trends driving banks are nuanced, with geographic factors playing a significant role in determining success. For example, banks in regions with net migration inflows are experiencing stronger prospects for loan growth and healthier credit conditions. In contrast, banks located in less favorable geographies are facing a tougher environment—struggling with weaker deposit bases and higher funding costs. If you know where to look, and what to look for, we think both scenarios present opportunities.

The 'higher for longer' interest rate environment is another mixed bag. While rising rates can boost profits for some banks, the benefits aren't spread evenly. Banks with differentiated deposit franchises are in a better position to capitalize. They can underwrite loans and invest in higher-yielding securities (assets) at today’s interest rates, which generally exceed embedded asset yields, without an equivalent increase in funding costs. A select number of banks also benefit from a disproportionate amount of near-term asset maturities, which will reprice to significantly higher yields. Surprisingly, the market hasn't fully caught on to this dynamic yet, and we’ve found situations where we believe fundamentals outshine the consensus view.

Not every bank is set to thrive. Notably, those with long-duration, low-yielding assets are paying the price with relatively weak aggregate returns and performance. With many bank stocks rallying since last summer and correlations running high, we see plenty of opportunity for stock pickers to identify winners and losers as fundamentals diverge over the next couple of years.

Insurance: A Sector of Contrasts

Businesses within the insurance sector are also far from uniform. We focus on three key areas—each of which has its own economics and drivers:

  • Insurance Brokers are riding the tailwinds of higher short-term interest rates and nominal GDP growth.
  • Life Insurers invest at the long end of the yield curve to match their long-duration liabilities, making their performance less about short-term rates and more about broader market forces.
  • Property-Casualty Insurers are more concerned with claims from weather catastrophes and social inflation than with interest rate fluctuations.

Within these segments, differentiation matters. Some property-casualty insurers are writing new business at better margins than their legacy books—others aren't. Some brokers dominate in regions and lines where pricing power persists—others don't. And not every life insurer has the right balance of asset leverage to withstand today's low credit spreads.

Health Care: Hidden Strength in a Volatile Sector

Over the past few years, health care stocks have been out of favor. A tech-dominated market, political scrutiny over drug prices and pharmacy benefit managers, the rise of GLP-1 weight-loss drugs, and a tough cost environment have all weighed on sentiment. More recently, concerns over policies a Trump administration may enact have added fuel to the fire. Despite the headwinds, we continue to find opportunities in this space.

Much like financials, the health care sector is anything but monolithic. Our focus is typically on mature pharmaceutical and medical device companies—businesses with established products and cash flow visibility—not speculative biotech or companies betting on breakthrough technologies. We’re finding names trading at attractive free cash flow yields with strong balance sheets and have an eye on those that may be candidates for M&A. We’ve also identified companies with depressed valuations that have long-term secular growth drivers the market is currently overlooking.

We have a long history of investing in health care, drawn to companies with stable cash flows, solid balance sheets, and stock-specific stories driven by management changes or margin improvement opportunities. Over time we’ve found that a patient, fundamentals-driven approach can serve us well, especially when volatility picks up.

A Market Ripe for Alpha

Whether in financials or health care, broad sector moves often mask meaningful differences in fundamentals. Given the increasing role of index and algorithmic trading, entire groups of stocks can rise or fall in tandem, even when their underlying businesses are on very different trajectories.

Our bottom-up approach is built on understanding the nuances of each business we own—identifying those with the potential to outperform as fundamentals diverge from market expectations. In an environment where headlines and macro factors often dominate the narrative, we continue to find value by looking where others aren’t—beneath the surface, where differentiated opportunities lie.

For a more comprehensive analysis of our investment perspectives and strategies, read our 4Q 2024 commentary.

 

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The views described herein do not constitute investment advice, are not a guarantee of future performance, and are not intended as an offer or solicitation with respect to the purchase or sale of any security. Investing involves risk, including loss of principal. Investors should consider the investment objective, risks, charges and expenses of a Fund carefully before investing. Please review the offering memorandum or prospectus of a Fund for a complete discussion of the Fund’s risks which include, but are not limited to: possible loss of principal amount invested; stock market risk; value risk; interest rate risk; income risk; credit risk; foreign securities risk; currency risk and derivatives risk.

Nothing contained herein constitutes investment, legal, tax, or other advice nor should be relied upon in making an investment or other decision. Any projections, outlooks or estimates contained herein are forward looking statements based upon specific assumptions and should not be construed as indicative of any actual events that have occurred or may occur. 

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