Premier equity head awaits US hikes

Premier equity head awaits US hikes

Premier’s Jake Robbins has made a “rare” move into US financials in his Global Alpha Growth fund in order to benefit from future Fed rate rises and cheap valuations.

The manager, who also acts as head of equities at Premier, has been adding to US banks JPMorgan and Bank of America this year, as well as insurance business AIG.

The changes mean Mr Robbins’ fund is one of the few in the Global sector to be meaningfully overweight the US, which now accounts for 63.3 per cent of his portfolio.

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Financials have been a controversial area since the credit crisis, especially in the US, where regulators have cracked down on risky lending and upped the required capital that banks must hold.

But Mr Robbins said some names in the sector were trading at cheap valuations yet generating around 10 per cent return on equity while being well-capitalised with minimal leverage.

“It’s quite rare for us to be a little bit overweight financials because banks, insurance businesses, life insurance companies, on the whole they don’t look like they are good-quality businesses. They’re very highly leveraged, which we don’t normally like, with such low interest rates they’ve struggled to generate acceptable returns,” Mr Robbins said.

“Despite the fact that they’re very heavily capitalised, their profitability levels are recovering and most of them are generating reasonable return on equity – 10 per cent or more. They still trade at very attractive valuations.”

Financials should be set for a further boost if the Fed continues to raise interest rates this year. Mr Robbins believes a second hike, to follow that made in December 2015, will soon arrive as employment and inflation figures continue to rise.

The manager credited the readiness of US banks to lend to consumers and companies as a reason for the pronounced recovery in the US market, in contrast to the eurozone’s sluggish growth prospects.

“One of the reasons why America has done better than most developed economies since is that the banking system has been functioning and has been able to extend credit to companies and consumers, in a way that probably hasn’t been seen in Europe or Japan, and that’s helped growth.”

Mr Robbins has shunned Europe due to negative interest rates and poor growth prospects for the eurozone.

“Europe’s been a bit funny for us. We made a good call [in 2015] by selling most of our European exposure. Europe rallied strongly on the prospect of quantitative easing and the belief that it would lead to stronger economic growth.

“The market went so far, so fast, with very little evidence that the underlying economy was improving at all, in fact there was a lot of evidence that it was decelerating, not accelerating, so we took advantage of the rally and sold out of a lot of our European positions.”

Two European names that are still included in the fund are Belgian postal services firm Bpost and Portuguese peer CTT, two of the fund’s largest holdings at 2.4 per cent and 2.1 per cent, respectively.