Financials sector hangs on sustained recovery

This article is part of
The Rise of Financials - July 2013

Financials have been the top-performing equity sector in the past year. Many banks and asset managers have seen near-50 per cent gains as the market has rallied sharply.

There are signs that many fund managers are softening on the sector as they believe its problems are behind it. Is now the time to re-examine the financial sector, or have the easy gains been made?

It is a mark of changing sentiment that the Polar Capital Global Financials investment trust managed to attract £153m at its launch earlier this year.

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The biggest buzz has been around the banks. Value managers have taken an interest in banks for some time, but there are signs growth managers are warming to the sector. Ian McVeigh, co-manager of the £878m Jupiter UK Growth fund, said recently that he believes the stabilisation of Lloyds had “far outrun the alarmist rhetoric of many self-interested critics”.

He says: “As capital continues to accumulate from the recovery in profits that the ... management team is driving, the capital position should improve further. This should set the scene for a period of significant recovery in dividends that ought to make the shares attractive to private investors as and when the government looks to reduce its holding.”

Even long-term financials bear Neil Woodford, manager of the £10.6bn Invesco Perpetual Income and £14bn High Income funds, was rumoured to be buying a stake in Lloyds, a suggestion he denied. However, he did say he believes HSBC has cleaned up its balance sheet and is now investable.

A perfect opportunity

“On the continuum of good and bad times to invest, is this the best time to invest in the banking sector? No it’s not,” says Kevin Murphy, manager of the Schroder Income fund. “However, is it better than 2007? Yes, it absolutely is, but some banks are more to the left and some are more to the right. As ever, it is about understanding the finer risks around banking shares.”

Mr Murphy points out that banks are still perceived to have significant structural problems. If they turn out to be merely less bad than expected, there should be scope for growth in share prices.

Away from banks, Guy de Blonay, manager of the ¤41m (£35.3m) Jupiter Global Financials fund, has taken some capital out of high-quality consumer credit companies such as Visa, where valuations have moved up significantly, and redirected the capital towards restructuring stocks.

He argues that the low interest environment will remain in place and the introduction of quantitative easing should be supportive for certain financials around the globe. On this basis, he has increased his weighting to Japan.

“The low interest rate environment is likely to be in place for longer, enabling good companies to restructure,” he says. “Companies with high dividend policies are also likely to offer investors good returns.” He is still significantly weighted to banks and asset managers, with Citigroup, Morgan Stanley, GAM and Franklin Resources among his top 10 holdings.