Legg Mason’s Sam Peters, who inherited the flagship fund of renowned value manager Bill Miller, has made financials his biggest bet for the first time since a major play on the sector decimated the team’s asset empire six years ago.
Mr Peters, who took over the Legg Mason Capital Management Value Trust in 2012, has placed financial services giant Citigroup among his biggest positions, citing the potential for “a gargantuan home run” if the firm breaks up.
Speaking exclusively to Investment Adviser, Mr Peters – who runs a similar US equity value investing style to his former mentor – said financials had reached the biggest sector weighting in the fund following a period of heavy buying.
He said: “I made a huge mistake [investing in financials during the crisis], but I have learned from the mistake. It does not hamstring me from taking advantage of financial stocks when the situation is different.”
The Value Trust surged to more than $21bn (then equal to £10.7bn) in size by 2007 after Mr Miller beat the S&P 500 index of US shares for 15 consecutive years until 2005, but in 2008 it suffered one of the most spectacular reversals of fortune ever seen in fund management.
Mr Miller had consistently added to financials as the credit crunch storm was brewing, viewing them as an attractive ‘value’ play, but underestimating the scale of the crisis to come.
The fund had large stakes in mortgage provider Freddie Mac – bailed out by the US government – and Citigroup, which fell by nearly 75 per cent.
Mr Miller eventually stepped back from his top fund in 2012, handing it over to Mr Peters.
Today Mr Peters runs $4.5bn across three versions of the Value strategy, including a Dublin-domiciled version and a UK-domiciled version, the Legg Mason US Equity fund.
The manager said financial companies, especially banks, had been so beaten up and overlooked by investors in the crisis that it would only take a small earnings improvement to generate significant returns.
He said he was still being questioned by clients on his view of financial stocks, due to a perception that the sector is being overly targeted by US regulators.
But the manager claimed this negative sentiment had generated huge value opportunities. He said higher interest rates would be positive for banks, and this had not yet been fully realised by the market.
On Citigroup, Mr Peters said the company had the potential for higher earnings when it stops playing “defence” and starts playing “offence”. He added the bank had a “10 per cent chance” of getting broken up in the next year and a 50 per cent chance within the next three years.
From a high of $55.2 per share in January, shares in Citigroup have fallen by more than 15 per cent to $46.2 per share last week, according to Bloomberg.
