The Financials sector ranks ninth out of the ten sectors as detailed in my Sector Rankings for ETFs and Mutual Funds report. It gets my Dangerous rating, which is based on aggregation of ratings of 46 ETFs and 232 mutual funds in the Financials sector as of July 15, 2014. Prior reports on the best & worst ETFs and mutual funds in every sector are here.
Figures 1 and 2 show the five best and worst-rated ETFs and mutual funds in the sector. Not all Financials sector ETFs and mutual funds are created the same. The number of holdings varies widely (from 21 to 540). This variation creates drastically different investment implications and, therefore, ratings. The best ETFs and mutual funds allocate more value to Attractive-or-better-rated stocks than the worst ETFs and mutual funds, which allocate too much value to Neutral-or-worse-rated stocks.
To identify the best and avoid the
Warren Buffett has made such an impression on value investors and insurance investors, that they think that float is magic. Write insurance, gain float, invest cleverly against the float, and make tons of money.
Now, the insurance industry in general has been a great place to invest, but we need to think about float differently. Float is composed of two things: claim reserves and premium reserves.
Claim reserves can be long, short or in-between. Yesterday's article dealt with long claim reserves - asbestos, environmental, etc. Those reserves can be invested in stocks, real estate, long bonds, etc. But most claim reserves are pretty short, like a year or so for most personal insurance
Editor's note: Originally published on 30 June, 2014
by Simon Lack
Denis Kessler, CEO of Scor, a large reinsurer, is the most recent critic of today's low interest rate environment. It's not only the stereotypical retiree clipping bond coupons that is suffering from current interest rate policy. Insurance companies typically hold substantial amounts of their investment portfolios in bonds, both because of regulatory requirements as well as the need to respond to claims whose timing is often unpredictable. Kessler claimed that central banks were "ruining" the insurance industry, and claimed that insurers were the unwitting victims of the aftermath of the financial crisis even though they didn't create it (AIG and its credit derivatives portfolio presumably notwithstanding).
Warren Buffett has described an insurance company's "float", that is, the premiums they receive in return for making payments in the future, as akin to being paid to borrow money. This is true