At the company level, the most significant news during the month came from the non-life insurance industry, with two separate pieces of news. Firstly, the results of the High Court case around business interruption insurance meant greater clarity for insurers held such as Hiscox about what their claims are likely to be from ‘lockdown’, and it is comfortably within the range of estimates already given by the company. This removes one of the overhangs on the shares and is why Hiscox was one of the largest contributors to performance this month. At the opposite end of the spectrum, the outcome of the FCA market study into car/home insurance pricing means that new and existing customers will be charged the same price if they come via the same sales channel (for example price comparison websites). This means a change of pricing model for insurers versus history, and it is unclear what the impact on future underwriting margins will be. Direct Line are currently in consultation with the FCA about the proposal, and we have a call scheduled with the Direct Line management team to learn more.
During September there were no new holdings, but existing holdings including diversified miner Anglo American, brick manufacturer Ibstock, vehicle hire company Redde Northgate and information services provider Euromoney were added to. These purchases were funded by reducing the (long held) position in defence equipment manufacturer Avon Rubber, and selling the remaining holding in HICL Infrastructure.
We have never known trading conditions for companies to be so disparate depending what end market the company operates in. Some companies held (such as Halfords and Studio Retail) are seeing very strong demand for their products, while other companies held (such as Ten Entertainment, which operates bowling alleys) are facing the uncertain prospect of further restrictions on trading (for example curfews, local or possibly even national ‘lockdown’). These very disparate trading conditions are meaning that topdown economic data is, in our view, providing little insight into the state of the economy. We cannot add value attempting to predict the course of the virus or responsive policy measures. Instead, we are spending our time talking to companies, in particular focusing on whether balance sheets can withstand further disruptions to trading and what valuations appear to be factoring in (in other words whether they are factoring in a swift return to ‘normal’ trading conditions, or not).