Which financial stocks appeal to equity managers?

Financials account for the largest sector exposure in the FTSE All-Share, MSCI Europe and MSCI AC World indices, so with such a large weighting to the sector in these main indices, where are equity managers finding attractive opportunities - banks, insurance or asset gatherers?

Jon Ingram, manager, JP Morgan UK Dynamic fund

Partnership Group. This is an interesting name because it offers strong growth potential. Their business model involves offering ‘enhanced annuities’ to people with health conditions or life styles that affect their life expectancy. This is a niche of the general retirement annuity market that is projected to grow more quickly and the stock has done well despite volatile markets.

Standard Life. This company is transforming from a traditional life assurer to being primarily an asset gatherer. Less capital is required to grow asset gathering than life assurance, so more cash may be returned to investors via dividends or buybacks. Future growth prospects may be bolstered following the RDR and the introduction of auto enrolment in the UK corporate pensions segment.

Lloyds Banking Group. The group has made significant strides towards becoming a ‘normal’ bank. Investors can now make investment decisions based on earnings momentum, valuation and quality. As the so called ‘mortgage spreads’ have strengthened, earnings have been upgraded. Also, the recovery in the housing market is leading to increased demand for mortgages.

Chris White, head of UK equities, Premier Asset Management

Direct Line. It is really a cost-saving story. It has come out of the Royal Bank of Scotland and management recently has really significantly increased cost saving targets for the group. This should be reflected in increased profitability going forward. When you screen for companies with dividend yields of more than 5 per cent and dividend growth and earnings growth then Direct Line would come pretty near the top of the list.

HSBC. It is a well run bank, well capitalised and the restructuring programme which has been put in place by Stuart Gulliver, the chief executive, is starting to bear fruit. HSBC is a super tanker and it takes a long time for change to work its way through the business, but I think there are some positive signs. On 1.3x book HSBC offers attractions to investors.

Phoenix Group. This is a slightly more speculative situation. I think if it can combine their operation with Admin Re [a subsidiary of Swiss Re], so two closed books of businesses come together, there should be significant cost savings and synergies and that would enable dividend increases over time. The dividend yield at the moment is roughly 7.5 per cent and trade at a significant discount to embedded value. It is speculative because that deal may or may not happen - the two parties are in the early stages of negotiations - but it is an interesting situation to follow.

Stephen Message, manager, Old Mutual UK Equity Income fund

HSBC. Within the broader financial sector, banks is the one area where we are yet to see a strong recovery. We are particularly attracted to the starting dividend as this company gives an attractive yield. But there is also particularly good scope for further growth for the dividend to grow up to 10 per cent over the next year. We find that attractive from an income point of view.

Barclays. We think the operating environment for banks is gradually improving and will continue to improve and the valuation for Barclays does not reflect that fact. It is under a new management team and given the valuation we find it attractive and there is good scope for dividends to grow over the medium term. Barclays has a dividend yield lower than HSBC, currently at 2.5 per cent, but there is room to grow.

Legal & General. Within the wider financial sector the life insurance area has a number of attractive options. L&G displays very good cashflow characteristics which means the company has a solid financial strength. We also see scope for the dividend yield to grow to 10 per cent over the next year. It has a strong balance sheet, a very good competitive position in the annuity market and good scope for growth in its asset management and savings franchises.

David Moss, director of European equities, F&C Asset Management

Svenska Handelsbanken. It has the lowest funding costs in European banks and is recognised as a conservative lender. They also have a multi-year growth plan that most European banks can only dream of. A new branch is opened every 8-10 working days, and it is ‘old fashioned banking’ with a lot of lending decisions made at the local level. Its not a main market lender, but with many UK banks capital constrained they can pick the business they want and the UK is much more profitable for them than Sweden. It looks expensive relative to other banks, but it also pays a dividend of roughly 4 per cent.

UBS. It had a horrible crisis as it was very big in investment banking and in the bad areas such as CDOs and sub-prime; it was effectively bailed out by the Swiss authorities. The market focus is always on the investment bank, but the private bank is one of the largest and while its reputation was hit, it was not destroyed. That area is very profitable. In addition a new management team announced a restructuring plan last year after acknowledging the capital allocation was wrong and that more focus should rest on the private bank.

Axa. It was treated as if it was as bad as a bank, as they were one of the more leveraged insurers. But they have come out of the crisis with very strong solvency and it pays healthy dividends, with a current yield of 4.5 per cent. It has also managed to increase its Asian business through acquisition. It is very attractively valued, well capitalised and somewhat tainted by the past, so it is a good quality company that is not recognised by the market.

Guy de Blonay, manager, Jupiter Financial Opportunities fund

Axa. Earnings growth is underpinned by diversified and buoyant businesses with amongst the best geographic diversification in the insurance sector. The company also has an ambitious and well-thought out strategic plan that should lead to efficiency and productivity gains across all their businesses as well as a recovery in product lines hit hard by the financial market dislocation in 2011.

Prudential. Prudential offers a very attractive mix of businesses providing exposure to the structural growth markets of the Asian life insurance sector, with investors also enjoying the benefits of a well-run, increasingly cash-generative life business in the US.

Lloyds Banking Group. Lloyds released very good first-quarter earnings figures and was among our top-performing holdings in both May and June. It reported falling provisions for impaired loans, strengthening our view that banking sector balance sheets are improving. The company was given a boost when UK Chancellor George Osborne confirmed that the government was actively considering selling its stake in the bank.