Introduction
Those funds that invest in financials typically hold institutions such as banks, asset managers, investment banks, credit card companies, insurance firms and stock exchanges.
In the year to July 9, the MSCI AC World Financials index rose 10.09 per cent, according to FE Analytics. It is not quite the gain made by the S&P 500 index, which is up 17.88 per cent over the same period, but not too far behind the MSCI World index, which increased 11.32 per cent.
Over a three-year period to July 9, the financials index is up an even more impressive 49.93 per cent.
Many fund managers are showing an interest in US banks in particular, but also European banks, as they prepare for continued uplift in the US economy. Marino Valensise, head of Barings’ global multi-asset group, has upgraded the sector to ‘preferred’, citing more favourable conditions for US and European banks.
David Eiswert, portfolio manager of the T Rowe Price Global Focused Growth Equity fund, suggests as the era of excessive accommodative monetary policies come to an end, large US financials are likely to benefit from rising interest rates.
He notes: “This sector has faced stiff headwinds, but it is one of the few in the US market where valuations are historically low. While financial companies have been constrained in the amount of capital they can pay out, the tough regulatory environment should start to improve or at least stabilise.”
Mr Eiswert adds: “[As] leading banks… benefit from rising rates and volatility during the transition to a more inflationary economy… the returns of those businesses should improve.”
Giles Worthington, manager of the Smith & Williamson European Growth Trust, has Bank of Ireland in his top-10 holdings and explains why he is looking closely at the banking sector in the current economic environment.
“Financials are typically higher beta and are geared to any recovery,” he points out. “If quantitative easing [in Europe] is to work, then banks have a key role to play in this through increased lending to companies and individuals. They must therefore be beneficiaries of this rising tide.”
There is reason to look further afield than banking groups in the US and Europe, though. Jan Dehn, head of research at Ashmore, observes China’s banks will undergo a “dramatic transformation” in the next few years.
He admits: “The outdated view of Chinese banks is that they provide long-term loans for local governments to implement infrastructure projects.”
While this has been the case historically, “the transformation of China’s banks into providers of consumer credit and private sector corporate finance is now well underway,” Mr Dehn says. “Banks are also emerging as providers of more sophisticated asset management services and more diversified savings products.
“In short, China’s banks are becoming much more like conventional, western-style banks.”
THE PICKS
Axa Framlington Financial
Vincent Vinatier runs this £42.2m fund that invests in financial services companies worldwide. Mr Vinatier’s approach is to find companies that demonstrate above-average profitability, management quality and growth, the fund factsheet states. FE Analytics shows in the three years to July 8, the fund returned 53.79 per cent. Among the portfolio’s top-10 holdings are Citigroup, Toronto-Dominion Bank and Prudential. The fund is skewed towards North America, with 45.81 per cent of the portfolio in this region. Banks, meanwhile, account for 52.82 per cent of the fund.
Polar Capital Financial Opportunities
John Yakas has delivered decent returns on this $33.5m (£21.5m) fund. In the three years to July 9, the fund returned 52.54 per cent, lagging the MSCI World Financials index, which was up 57.90 per cent. Mr Yakas has managed the fund since its launch in 2010, with the aim of achieving long-term capital growth. The portfolio has its largest weighting to diversified banks at 35.5 per cent, while regional banks make up 11.2 per cent. Its factsheet reveals the portfolio has a 28.1 per cent weighting to North America and 13.7 per cent allocated to the UK.
EDITOR’S PICK
Fidelity Global Financial Services
Launched in September 2000, this £499m fund is managed by Sotiris Boutsis, who looks for companies with improving fundamentals. The portfolio has 75 holdings, with JPMorgan Chase & Co, Citigroup and Intesa Sanpaolo making up its top-three stocks. Over 10 years to July 8, the fund returned 78.13 per cent, ahead of its benchmark, the MSCI ACWI Financials index, which was up just 33.45 per cent. In the past year to July 8, the fund maintained that outperformance, generating 17.55 per cent, while the index rose 10.09 per cent.
