Managers, advisers divided about weighting insurance

Some are buying, expecting a run-up; others stay far away

Aug 25, 2008 @ 12:01 am

By Darla Mercado

The second quarter hasn't been kind to mutual funds that focus on the life insurance sector.

Yet managers and financial advisers are divided about the buying opportunities for the remainder of the fiscal year.

Most insurers, including American International Group Inc. of New York, had a tough quarter, and large-cap-value funds with holdings in these companies also saw red as the slumping sector put a dent in their returns.

Yet value-oriented managers see this downturn as an opportunity, but the philosophy of many advisers is to stay far away from insurers and the financial sector.

"It seems to me that a value fund that is equal-weighted or overweight in financials needs to be careful as to whether they're seeing this as a value play or as an aggressive investment," said Robert K. Haley, certified financial planner and president of Advanced Wealth Management in Portland, Ore., which has about $80 million in assets under management.

Still, some managers see the life insurance sector as a financial sector safe haven, particularly when comparing those companies with investment banks.

"Being overweight in life insurance has helped us relative to the market," said Steven H. Scruggs, director of research at Bragg Financial Advisors Inc. in Charlotte, N.C., and manager of the Queens Road Value Fund, which has $10.8 million in assets.

"I think it's understandable that the life insurers have exposure to the issues that killed the commercial and investment banks, but to a smaller degree," he said.

Bolstering Mr. Scruggs' faith in the sector is the nature of the carriers' business, which requires them to maintain stronger capital positions so that they can fulfill the contracts behind their products.

He expects New York-based MetLife Inc., American Family Life Assurance Company of Columbus in Georgia and Aegon NV of The Hague, Netherlands, to rise in value. Insurance stocks may take another beating for the next six months, but they will become popular again in the next year or two — which makes them a plum long-term investment at current price.

"When sentiments change, there will be a great demand for the companies that are left standing and that are in good capital positions," Mr. Scruggs said. "It could be a year or two from now, and we'll buy until then so we'll have exposure when it goes back up."

For now, though, the fund, which maintains a 9.06% exposure to life insurance companies, has slipped to about 9.32% during the year.

Other year-to-date laggards include the Fidelity Select Insurance fund, from Fidelity Investments in Boston, which has lost more than 30% of its value, and the BlackRock Global Financial Services A fund, from BlackRock Inc. of New York, which has slumped by more than 26%, according to data from Morningstar Inc. of Chicago.

But where the managers were upbeat about future prospects for insurers and financial firms, advisers predicted more trouble.

Future subprime-related damage to insurance carriers and their ilk is still a major unknown, according to S. Nick Massey, a CFP and regional vice president of the Householder Group in Edmond, Okla.

"There is so much damage in the financial sector that it will take a while to work out," he said, forecasting tough times for "the next six months to a couple of years."

On the managed-account front, advisers also dodged many financial services companies, thereby avoiding low performance.

However, investment in casualty and workers' compensation insurance companies allowed managed accounts to avoid the write-downs that battered other financial stocks, said Marc B. Schindler, certified financial planner and partner at Pivot Point Advisors LLC in Bellaire, Texas, who manages $31 million.

Between summer of 2006 and the end of last year, the firm's allocation model kept a 15% to 20% exposure in the financial sector, primarily in insurance. Currently, exposure to financials is limited to 5% and 3% for insurance — and the model is positioned for continued difficulty in both groups.

However, mutual analysts expect continued investment in insurance, even as financial companies report billions in write-downs on mortgage-related holdings and cut their earnings forecasts for the full year.

"I can't say for sure what [the managers] are doing with insurance or financials, but I wouldn't be surprised if they were either holding steady or buying more," said Morningstar senior fund analyst Dan Culloton, speaking about of the fund management at the Hotchkis and Wiley Large Cap Value 1 fund, from Hotchkis and Wiley Capital Management of Los Angeles, a $2.6 billion fund with 7.76% exposure to the life insurance sector.

The fund, whose holdings include the beleaguered Freddie Mac of McLean, Va., and Richmond, Va.-based Genworth Financial Inc., has slid by about 22% year-to-date.

"They're not afraid to buy out-of-favor stocks, and they will often buy more if they like the company and the market doesn't," Mr. Culloton added.

Although some of those financial services companies will survive the current difficulty and ultimately be worth more in the next three to five years, advisers hardly see it as a gamble worth taking.

"Any mutual fund manager who overweights banks and insurance companies is investing as much on hope as they are on knowledge," Mr. Haley said. "Some will prove to be right, but not necessarily because of what they knew but because of the way things will unfold."

E-mail Darla Mercado at


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