Prospector’s Concentration in Financials

The team at Prospector Partners continues to position our funds with large overweights in the financials sector compared with our benchmarks. While this has been a long-standing style bias within our portfolios, it is something we frequently receive questions about and worth revisiting our rationale for the sector tilt.

At a high level, considering our focus on downside risk mitigation, we have always gravitated toward less-cyclical sectors with more predictable cash flows, including financials and consumer staples. When most people think of financials, they think of large banks that are highly levered.  The types of financial companies we own are very different; the firms we target tend to be among the most conservative in the industry and typically have much lower levels of leverage.

Prospector's Concentration in Financials

From an industry standpoint, it’s important to note that we have a high level of expertise in property and casualty insurers and historically we have been successful at finding strong investment opportunities here. However, there are many, many different segments and sub-segments within financial services that we will own. We divide our coverage across these various groups and focus on specific economic and financial drivers that affect each group differently.

Four of our portfolio managers/analysts have over 20 years of experience each looking at financial services companies. All of them have long-standing relationships with management teams at these companies and often can glean as much information by the manner in which a CEO or CFO says something as what they’re actually saying.

Most people think about financial services stocks and incorrectly believe that if interest rates go down, these types of stocks usually go down. That’s not the way it works for many of the companies we’re investing in, which aren’t as levered to interest rates (for example, property-casualty insurers, insurance brokers, and over-capitalized bank and thrifts), and tend to have multiple different ways to “win.” It’s rare that either the economic cycle or current interest rate policy is the key driver for a company we own.

We also believe the unique way we analyze balance sheets and utilize regulatory databases gives us a considerable edge compared to other managers who look at these same industries. Many investors are primarily focused on regulatory filings like 10-Ks and 10-Qs. While we analyze these reports, we have analytical processes in place to also utilize statutory statements and other regulatory filings that other managers may not have the expertise, capabilities or time to dig into.

Lastly, in terms of a broader reason to pay attention to financials today, between 2002 and 2006, financials made up over 20% of the S&P 500 Index.1 Today, the sector accounts for approximately just 11%.Similar to the decreasing weights of other sectors in major indices (which have been displaced, in part, by ballooning tech companies’ market caps), investors likely have less exposure to these segments of the economy than they realize. This could result in major repercussions if we experience mean reversion and some of these recently ignored sectors, like financials, outperform and trend back toward their longer-term weightings.

For more information on what we look for in prospective investments throughout the financials sector, we encourage to explore these two posts that get into more detail:

Read Statutory Data: A Look Under the Hood of an Insurance Company

 

1 https://blog.prospectorpartners.com/why-invest-in-a-shrinking-financial-sector
2 https://www.ishares.com/us/products/239726/ishares-core-sp-500-etf

 

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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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