A commitment to proprietary fundamental research has helped the £115.6m JPM Global Financials fund deliver steady performance at a time when financials have been among one of the more volatile asset classes. Alex Robins, client portfolio manager on the fund run by Peter Kirkman and Simon Poncet, says this focus is the fund’s primary driving force.
“The valuation model measures an individual stock’s internal rate of return and allows the team to systematically capture the value-added insights of our research team. The team focuses on the long-term valuation of each company,” explains Mr Robins.
He says the fund adopts a bottom-up process, with a focus on individual company fundamentals, long-term earnings power and valuation metrics to select investments in the sector.
He adds: “Our fundamental research process is currently showing us some very powerful valuation signals. According to key valuation metrics, a number of banks remain cheap versus their long-term average and earnings have significant room to recover. In the western world the financials sector has undergone a lot of repair work since the global financial crisis and there are some very strong value and growth opportunities in emerging markets.”
As a financials fund, the risk/reward level of the fund, according to its Kiid, stands at 6, towards the higher end of the spectrum, while the ongoing charges are stated as 1.68 per cent.
The fund is one of the longest-running financials-focused vehicles, having been launched in December 1954. Its performance in the five years to July 3 is a respectable 50.79 per cent, given the aftermath of the financial crisis. However, it lags the benchmark MSCI World Financials index return of 74.88 per cent in the same period, according to FE Analytics.
The portfolio itself has its highest weighting in regional banks, roughly 40 per cent of the fund, while the largest geographical weighting is to the US.
Mr Robins notes: “Now the issues surrounding the eurozone are being addressed through the Targeted Longer Term Refinancing Operations (TLTROs) and so on, we believe stock-specific risk will again become the key driver of share-price returns. We like lower-risk stocks, such as HSBC and Standard Chartered, where the current funding model is working, and which offer gearing to emerging market growth. We also like recovery stocks with strong operational leverage, and where the normalisation of financial markets should enable their return on equity to recover from bottom-of-the-cycle levels.”
The manager points out that, while leverage is still an issue, “we believe a number of European banks do not need further capital”. He cites the examples of strong turnaround stories including Unicredit and Credit Suisse.
Meanwhile in the US he notes a number of banks have seen strong returns, with certain stocks still attractively valued.
“After the stress tests carried out last year, a number of banks have been given the green light for capital distribution and balance sheets are in much better health. Within regional banks, an increase in the shorter end of the curve is largely priced into valuations, so we have a preference for the money centres, brokers and investment banks such as Bank of America, Morgan Stanley and State Street,” he explains.
Elsewhere Mr Robins highlights opportunities in companies benefiting from structural growth and low credit penetration in the countries they operate in, such as Asian banks, including those benefiting from India’s relatively small mortgage market.
Outside the banking sector the fund holds a number of insurance companies, as the sector has fewer structural problems than the banking sector but has similar valuations.
“Market sentiment is currently still negative on the insurance sector due to the low interest-rate environment. However, we believe market fears are over-done, bond yields will normalise and fundamentally a number of insurance stocks are attractively valued,” he adds.
EXPERT VIEW
Darius McDermott, managing director, Chelsea Financial Services:
Verdict
This fund favours large-cap companies and has a fairly concentrated approach, with almost 40 per cent of the fund in its top 10 holdings. It has significant positions in large global banks but also favours emerging market banks in Asia. The fund has overweights in Hong Kong, China and India, although the majority of the fund still resides in developed markets. Its underweight in Reits has hurt recent performance. The fund has struggled to beat the index over a long period, not helped by a disastrous 2008, and it has underperformed in the past few years as well. We think there are better opportunities elsewhere.
