Your Industry  

Fund Review: Financials sector

Introduction

But the financials sector is not out of the woods yet, as shown by the recent $8.9bn (£5.2bn) penalty handed out by US authorities to BNP Paribas for sanctions violations and the €1.7bn (£1.4bn) credit line extended to Bulgaria’s banking system by the central bank following runs on two of the country’s lenders.

While the sector faced a sell-off following the financial crisis in 2008, those who bought into financials when they were cheap may be reaping the rewards now.

According to FE Analytics, the MSCI AC World Financial index has delivered a return of 20.63 per cent in the three years to July 2, not far behind the MSCI World index return of 30.48 per cent for the same period. The data also reveals how closely correlated the financials index is with the MSCI World index.

The term financials refers not only to banks but a wide range of businesses, so funds that invest in the financials industry may also have holdings in asset managers, investment banks, insurance firms, stock exchanges and even property.

In the wake of the crisis, the sector has undergone a regulatory shake-up, with the introduction of Basel III, a voluntary capital adequacy standard. In the UK the banking sector is now under the scrutiny of the new regulatory body, the Financial Conduct Authority.

John Baker, a portfolio manager at JP Morgan Asset Management, observes: “I think the biggest influence of the legislative changes is that they’re coming out of this with simpler business models.”

He agrees that the sector is becoming much more investable following a period of regulatory reforms.

“The individual companies are much easier to analyse and understand,” he explains. “It’s very difficult to forecast the degree to which legislation may change in the future. [But] clearly, there are still issues outstanding. The BNP [Paribas] fine potentially raises the risk that there could be additional large fines levied against European banks for their operations in the US but we just do not have any clarity on that.”

Guy de Blonay, lead manager of the Jupiter Financial Opportunities fund, cautions that there are two main “unknowns” among wholesale banks: regulation and litigation risk. With this in mind, he has reduced his portfolio’s exposure to wholesale banks that he believes are carrying litigation risk.

He says: “I would argue that mid-2014… the worst of the regulatory requirements are behind us and banks, generally speaking, have been or are in the process of getting their houses in order to make sure any stress test, especially the European stress test that is coming in October, will not show any surprises.”

Mr de Blonay continues: “The other element, which is always much more difficult to quantify, is litigation risk.

“So we’ve got almost no exposure to these investment banks that carry a relatively big amount of unknown risk in relation to litigation.”

While there are opportunities in financials, investors need to keep in mind that some risks do remain.

Ellie Duncan is deputy features editor at Investment Adviser

FUND PICKS

AXA Framlington Financial

Susan Sternglass Noble is manager of the £41.3m AXA Framlington Financial fund, which she took over in February 2011. Its performance has picked up since she has been running the portfolio, delivering a return of 25.55 per cent in the three years to June 27, according to FE Analytics. The objective is capital growth through investment in financial services companies worldwide, with 49.08 per cent of the fund currently in North America. Holdings include banks, and companies in sectors such as insurance, property and investments, including firms such as American Express and BlackRock.

Invesco Perpetual Global Financial Capital

It is early days for this £94.1m fund, having only launched in January 2012, but with the experienced Paul Causer and Paul Read managing the fund it could provide an opportunity for investors. The portfolio is currently positioned with 57.94 per cent in banks and 13.32 per cent in insurance. Its aim is to achieve a combination of capital growth and income over the medium to long term, by investing mainly in capital instruments issued by banks and financial institutions. In the year to June 27 the fund has achieved a modest 17.24 per cent return but it could be one to watch.

EDITOR’S PICK

Sanlam Global Financial

This fund uses a value investing approach to provide long-term capital growth, with its search focused on undervalued and undiscovered stocks. This $321m fund has a 10-year track record and has delivered impressive returns over five and 10 years of 107.13 per cent and 224.68 per cent, respectively. Among the top 10 holdings in the portfolio are Citigroup and Barclays, with the Bank of Georgia its largest position at 5.49 per cent. It has been co-managed by Kokkie Kooyman and Sanlam Asset Management (Ireland) since its inception in April 2004.

In this special report