Financials recovery continues apace

JPMorgan Asset Management’s US Equity Income fund manager Clare Hart, Jupiter’s Sebastian Radcliffe and Neptune’s Rob Burnett have all recently featured in Investment Adviser suggesting that financials offer “good value” or “an excellent opportunity”.

While these managers run wide remits – equity income, European, US funds – there are vehicles available to retail investors that focus solely on the financials sector.

There are approximately 13 financials funds listed across the IMA sectors, the newest being the Invesco Perpetual Global Financial Capital fund, managed by Paul Causer and Paul Read, and the Aptus Global Financials fund.

The £125.3m JPM Global Financials fund is the oldest available vehicle, having launched in 1954. Managed by Peter Kirkman and Simon Poncet, this fund has had a difficult period in three, five and 10 years, delivering bottom quartile returns when compared with other financial services-focused funds.

However, the past year has seen it surge into the top quartile, with a 40.18 per cent return to date (July 16).

Financials funds have had a difficult time in the past five years, as the banks sat at the epicentre of the global financial crisis. The FTSE All-Share Financial Services index has returned 45.61 per cent in five years to July 16, compared with a FTSE All-Share return of 59.35 per cent for the same period.

In the past year, however, the FTSE All-Share Financial Services index has more than doubled the return of the FTSE All-Share index at 54.13 per cent, compared with the wider index’s 22.6 per cent return.

According to its June 2013 factsheet, financials makes up 23.67 per cent of the FTSE All-Share index, making it the largest sector exposure. The Oil & Gas sector is the second-largest weighting, at 15.28 per cent.

On a global basis, the financials sector has rallied year to date, with the MSCI World Financial index surging ahead with a 23.35 per cent return, compared with the wider MSCI World index return of 22.04 per cent.

The global banking sector has also had a good start to the year, although it has lagged the financial services sector, which includes asset managers and insurers as well as banks. The MSCI World Banks index rose 17.7 per cent year to date to July 16, and managers expect this good run to continue throughout the year as the recovery in the banking sector continues and regulation is tightened.

In their latest investment commentary, the managers of the popular £531.8m Jupiter Financial Opportunities fund, Guy de Blonay and Robert Mumby, explain: “Regulators around the world have begun to implement the Third Basel Accord [a set of international regulatory standards for banking]. Many initiatives, such as a requirement for banks to report taxes and profits on a country-by-country basis and a cap on bonuses, have proved controversial.

“Other measures have been more uniformly welcomed: banks will need to demonstrate they have enough liquid assets to survive a 30-day market crisis, and they will have to back a greater portion of assets with shares.

“But some major banks are already close to achieving the required capital ratios (ie the proportion of cash and shares compared to lending). Once this process is complete, we believe they could increase dividends, making them attractive investments for income investors fleeing low yields in the bond markets.”

It is clear the banking sector has come a long way from the depths of the 2007 financial crisis, but investors would be wise to proceed with caution, as even the experts admit volatility remains in the sector.

“We sense a more benign view of the sector,” says Polar Capital’s Financial Opportunities fund manager John Yakas, “since in recent years there have been more severe jitters surrounding the sector when markets are correcting. We hope this suggests investors are finally accepting that the sector has put the worst behind it.”

Jenny Lowe is features editor at Investment Adviser