Allianz’s Gergel weighs up stake in Lloyds

Allianz Global Investors’ Simon Gergel is eyeing up a position in Lloyds Banking Group as the government prepares to divest more of its stake in the bailed-out bank.

The manager of the £643.9m Merchants investment trust said Lloyds appeared “fully valued” at its current share price – roughly 82p a share last week – in spite of the bank possibly paying its first dividend since it was bailed out by the government in 2008.

However, he added: “The day when we own Lloyds might not be too far away.

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“We never buy just for a yield [but] we look at banks more closely when they pay dividends because the balance sheet is better.

“Banks are quite hard to value because they are so geared to the economy and financially geared. You can paint a wide range of scenarios to show banks being cheap or not. I don’t have sufficient confidence to hold any just yet.”

Mr Gergel – who also runs the open-ended £85.7m Allianz UK Equity Income fund – said the UK market in general was beginning to look “fully valued” at the end of last year, but added that the falls in January had been “quite modest” and had not yet resulted in a large number of buying opportunities.

The FTSE All-Share index fell 3.1 per cent in January, driven chiefly by concerns that some emerging economies were struggling to deal with inflation and currency volatility.

Highlighting the Merchants trust’s exposure to emerging markets, Mr Gergel said: “We’ve been saying for a couple of years that we like exposure to emerging markets but 3-6 months ago I said we couldn’t really

find many opportunities that weren’t fully valued.”

The manager said some stocks with exposure to developing markets were beginning to look more interesting, citing in particular top-10 holdings GlaxoSmithKline and United Business Media.

The trust, which this month celebrates its 135th anniversary, has posted a share price gain of 142.6 per cent in the five years to February 10. The shares have been trading at a modest premium to the value of the portfolio since October.

The trust has also maintained a policy of increasing its payout to shareholders for 31 consecutive years. In 2010 and 2013 this meant the board had to dip into the Merchants trust’s cash reserves to preserve this record, but Mr Gergel said it was unlikely the trust would have to use the reserves in the future.

“We had to dip into reserves in 2010 and again in 2013 but we are coming through that period,” the manager said. “For a while the directors were reticent to issue new shares when they were dipping into the cash reserves to pay the dividend, but the board is more confident now. We don’t want the premium to grow too large.”