Legg Mason’s Sam Peters has pledged to retain his high weighting in financials, in spite of the sector proving a drag on returns so far this year.
he US value investor has also begun piling money into beaten-up energy stocks and housebuilders, which he claimed were at “multi-decade lows” in terms of valuation.
But he is set to keep the faith with embattled bank stocks, with financials remaining his biggest sector weighting, even though it has not yet “fulfilled its promise”.
Mr Peters said the stocks were “still incredibly cheap”, especially Citigroup, which is the top holding in his Legg Mason US Equity fund, the UK-domiciled version of his US fund, the ClearBridge Value Trust.
The banking sector in the US has been under intense regulatory pressure, which Mr Peters said had been depressing stock prices.
But his stocks had also been hit by the fact that expectations for the first rise in US interest rates keep getting pushed further out.
Mr Peters said one of the reasons he had bought banks was because “they are still positioned asymmetrically for a rise in rates”, which could hurt other stock market sectors. But he added: “This year rates have gone the other way.”
The manager said the sector remained a “very, very cheap play on higher interest rates”, which should help the fund when rates are raised as expected in 2015.
In spite of the performance drag from the lagging financials sector, Mr Peters’ fund has still generated top-quartile returns in the past year, compared with the IMA North America sector, and the fund is also top quartile since he took over in 2012.
Performance has been driven by the fund’s positions in ‘legacy tech’ stocks, companies that had been sold off heavily in previous years as investors worried about their future in the face of disruptive new technologies.
Mr Peters has also benefited from the resurgence in the biotechnology and healthcare sectors, which he had bought into five years ago when the sector was “on its back” following years of underperformance.
But he said he had been reducing his positions in the healthcare sector recently and shifting it into sectors that had been lagging in terms of performance.
He warned that when any sector has done as well as biotech has it begins to attract “hot money”, which flows into the sector “like bees to honey”.
But as soon as sentiment turns against the sector, the hot money can just as quickly leave, exacerbating share price falls.
Mr Peters has instead bought into housebuilding stocks for the first time in two years because the housing cycle has disappointed and the stocks have fallen to “single-digit, price-to-earnings ratios”.
He thinks the sector could rebound in 2015, aided by the boost to consumer spending from low gas prices and continued low interest rates.
Mr Peters has also been adding to energy stocks, which have been sold off as a result of the low oil and gas prices.