Captives should invest in equities: Barclays Wealth

Captive owners should focus their investment strategies on the equity markets at the moment, especially given the long-term outlook of most.

This is the opinion of Henk Potts, director of global investor strategy, Barclays Wealth, speaking at the Bermuda Captive Conference held in Bermuda this week (Monday June 8 to Wednesday June 10).

In a broad presentation dealing with the global economic outlook and investment strategies within this context, he admitted it had been a difficult 12 to 18 months for investment strategists because so many investment classes had not behaved as predicted.

He also stressed that anyone who confidently predicts the behaviour of stock markets is either “guessing or lying” but he said that given that captives are long-term investors they should take advantage of what remain attractive opportunities and returns from equities.

“Time is your friend when it comes to the equity markets and as captives are long-term investors they should take advantage of that,” he said. “We think the equity markets represent an attractive opportunity for captives. The longer you hold on, the greater the opportunity you have to outperform.”

He added that US equities in particular have performed very well overall in recent years despite a few blips. “And it is worth noting that earnings expectations for 2016 have started to rise,” he said.

Potts said he has been asked many times recently whether, given the US equity markets’ strong performance in recent years, they look expensive now. The S&P 500 is currently trading at a PE multiple of x17.

To answer this question, he looked at historical data and discovered that there had been many occasions historically that it had traded at this level. But on no occasion in the 12 months following these instances had it ever produced a negative return and the average return over the next 12 months was 13 percent, he said.

“We think there is no reason for investors to be spooked by these valuations,” he said.

But he did also recommend that investors also start diversifying away from US equities and explore the European markets. He said he expects a number of favours to combine to boost the equity markets in Europe, representing another opportunity for captive investors.