Omam’s Murphy revisits bank shares
Old Mutual Asset Managers’ (Omam) Simon Murphy has added Barclays and Standard Chartered to his £82.2m UK Select Equity fund.
While still cautious, he said investors appeared to be rediscovering an appetite for bank sector shares, with the UK banking sector up more than a fifth through the winter months.
Jupiter’s top-down investing veteran Philip Gibbs has also started investing in Barclays, which saw its shares dive in the 2007/8 credit crunch.
Mr Murphy said his call to be underweight financials, particularly banks, in the past few years had proved beneficial – in the five years to end 2011, banking sector shares lost 63 per cent against a gain of 8.6 from the wider FTSE All-Share index of UK equities.
Where he did hold financials the manager bought life insurers, and specialist plays, such as buy-to-let finance provider Paragon, sub-prime lender Provident Financial, non-life insurer Lancashire and asset gatherers Schroders, Jupiter and Aberdeen.
But he is moving back into banks amid extremely low valuations relative to history, with the pan-European banking sector currently valued at 0.66 times its tangible net assets, or book value.
“Capital ratios are also generally much stronger than pre crisis and balance sheet risk has significantly reduced, while disclosure levels are far higher than ever with respect to the assets on banks’ balance sheets,” he said
“Financial strains in the European financial system have also greatly eased as a result of the provision of essentially unlimited three-year liquidity by the European Central Bank.”
As for the negatives, there is obvious potential for further escalation of the eurozone sovereign debt crisis and its effect on the value of large components of bank book values.
Mr Murphy also notes further changes to the regulatory environment, such as a financial transaction tax that could potentially limit future returns on capital available to the sector.
“In many instances, significant balance sheet risk reduction still needs to be completed, while banks are also geared to the economic cycle and suffer in a recessionary environment,” he added.
“On balance, we are minded to side with the positives, although remain particularly wary over the risk of political interference, as a result of the combination of public anger towards the sector and high levels of state ownership in several banks.”
In a UK context, this has seen the team avoid Royal Bank of Scotland and Lloyds Banking Group, building positions in Barclays and Standard Chartered instead.