Despite the significant macro headwinds in 2022, it was the second year in a row that financials outperformed wider equity markets. Rising interest rates led to positive earnings revisions for banks while insurance companies also benefited from the continued more favourable background for insurance rates. Against this backdrop the Trust’s net asset value fell 0.6% against our benchmark index, the MSCI All Country World Financials Index, which rose by 1.6%. Global equity markets fell by 8.2% as illustrated by the MSCI All Country World Total Return Index.

Sector review

Insurance had an excellent year, rising 16.7% as it benefited from its defensive characteristics on top of the tailwinds described above. Banks rose 1.4% as, despite benefiting from positive earnings revisions the uncertain outlook weighed on sentiment, while Diversified Financials and FinTech suffered falls of 7.7% and 25.8% respectively, the latter as high valuations and disappointing earnings were a toxic combination.

2022 was one of the worst years on record for financial markets, albeit for sterling investors nowhere near as bad as can be seen from the figures above. Looking forward, we remain very constructive on the outlook, despite the shorter-term uncertainties which would argue for caution for a sector that is unashamedly cyclical. Today banks, as we have reiterated many times, are more robust with significantly greater levels of capital and liquidity than before the global financial crisis.

As importantly, if not more importantly, their risk appetite coming into this downturn is at a level which would suggest much lower loan losses. In plain English, banks have done far fewer dumb loans than in previous cycles. The unknown for bank investors over the next year is what will be the degree and duration of the downturn and therefore the cost to bank profitability.

Does the banking sector see further weakness along with wider equity markets, in anticipation that the downturn will be more severe, before recovering as investors realise that this is not a repeat of the global financial crisis or the early 1990s downturn? Or do investors start to see through the shorter-term weakness and see the value in buying banking shares due to their longer-term value and bid up share prices to reflect their longer-term value and earnings potential?

Looking forward, we remain very constructive on the outlook, despite the shorter-term uncertainties which would argue for caution for a sector that is unashamedly cyclical.
Unlike the banking sector where investors have understandably stepped back as they see risks of a recession impacting short-term earnings and to an extent ignored the longer-term improvement in their earnings from higher interest rates, for non-life insurance companies investors are willing to look through the shorter-term impact to their earnings. We have been very constructive on the non-life insurance sector and continue to be so, albeit conscious that its performance as described above was in part due to its defensive characteristics.

However, with non-life insurance companies there has been a material improvement in underlying earnings from better underwriting returns due to higher insurance premiums relative to claims costs and also higher investment income. Understandably, investors have willingly paid a higher multiple for that stream of earnings. Similarly, reinsurance companies have performed well despite 2022 being another poor year for returns, as reinsurance premium rates were forecast to rise sharply, which has been confirmed subsequent to the year end.

For now, we remain cautious on asset managers and investment banks, the former in the belief that equity markets will probably struggle and therefore flows will likely continue to remain weak, and in the latter as they are reliant on activity in capital markets which we believe will be slow to recover. We own shares in MSCI and S&P Global as beneficiaries of the continued demand for ETFs and for data and services across their product areas.


The portfolio remains overweight banking stocks – albeit by not as much as this time last year – where we see material upside in share prices. Otherwise, broadly the portfolio remains positioned in more defensive areas of the sector, notably non-life insurance, payments, fixed income securities (where we have increased exposure) and information services companies. We have also increased our exposure to Asia as China starts to recover from its self-imposed zero-Covid policies and will look to tilt the portfolio to higher risk segments of the sector as well as using higher gearing when the risk/reward improves further.