Phoenix Group, PHNX, That Flight To Quality During Inflation?

Tim Worstall
Updated: 13 May 2022

Key points:

Phoenix Group (LON: PHNX) shares are part of the FTSE 100 and it’s a mature insurance business. This might make us think that it’s not a grand opportunity for a trading tactic. For a long-term investment strategy, perhaps, but not for in and out trading. Yet there’s a small spread (0.6 pence, or 0.1%, close enough) and Phoenix shares are up 2.6% today and 5% over the last 5 days.

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This means that trading is possible even if we’d need to be very careful about positioning of the direction of the trade. This means having a look at what might be interesting investors at present.

Given that PHNX is part of the FTSE100 there is obviously substantial institutional interest. Those tracker funds have to be in Phoenix or at least in a synthetic that tracks the performance. But what we’ve been noting these past few days is a rise in interest among individual investors. There’s no particular news to drive this, no results released. So, what is it?

This requires a step back – a leap back in fact – to how to invest during inflationary times. The last time anyone really had to do this was the 1970s which is indeed the last time sterling faced strong inflationary pressures. We’ve also got the near-certainty of rising interest rates to deal with it.

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So, how do we invest to beat inflation? The answer is that the relative values of different business structures changes. In a low interest/inflation environment then significant capital investment to make future profits looks good. This is one explanation – and only one, there are others – for the tech boom of the past couple of decades.

However, when both are rising then mature businesses making money right now become more attractive relative to those capital hungry ones. Both inflation and high interest rates make more money now more attractive than jam tomorrow. This doesn’t mean that capital growth stories don’t work in such markets. Only that they’re less attractive relative to those established businesses. The relative prices of the two types of business change that is.

So, as we’re likely to have to rediscover, a useful investing strategy in such a time of inflation and rising interest rates is to cycle out of tech and other capital hungry sectors and into mature and cash-generating ones. Of which the business of life insurance and assurance is one. Which could indeed be the reason for that interest in Phoenix Group. It’s simply where long-term investors might want to be during rough economic times.

There’s also a certain amount of inflation protection as well. Revenues tend to be a percentage of the cashflow on an insurance product, or with wealth management a percentage of the stock. So, as money becomes worth less (which is what inflation is) the nominal values of those flows and stocks rises, so does the management slice. This isn’t a perfect hedge but we would expect gross revenues to rise along with inflation.

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