Which financial sector stocks are proving most appealing 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.