Stuart Mitchell has remained committed to European banking stocks in his €65m (£56m) SWMC European fund despite the negative interest rate environment, but admits the holdings are the most “controversial” in his portfolio.
The manager said concerns that an unusual monetary policy environment would affect banks’ profitability were overdone, and confirmed he was keeping 12 per cent of his fund in such companies.
The fund holds banks such as Intesa, Banco Populaire and Commerzbank, in the belief they should be worth 50-100 per cent more than the current share prices. Mr Mitchell added it was “not obvious” to him how low interest rates were bad for banks.
“It’s a very complicated calculation. What people will tell you is: ‘the problem is that the banks have quite a lot of current account funding and you can’t reduce the cost as interest rates come down’. But that’s just not true in reality,” he said.
He believes banks can reduce the cost of funding and increase loan spreads, as well as promote other products, to help offset low rates. When deposits come up to repricing, he suggested banks could offer funds to invest in rather than recommending a deposit that will yield a half or one percentage point less.
“The impact is not as significant as many people think. There are all sorts of things that banks can do to offset that,” he said.
Mr Mitchell also favours a value-oriented approach in his other holdings, steering clear of large-cap international earners, such as Nestlé and L’Oréal, on valuation fears. Instead he is targeting domestically focused firms despite ongoing concerns over growth on the continent, and more specifically the eurozone. The only large cap held by the fund is GlaxoSmithKline.
“Our view is that there has been a flight to safety, [but] we’re beginning to come out of it,” the manager said.
“We’ve had a prolonged period of risk aversion and that’s driven people more and more into international companies, and our view is that valuations are stretched.”
He added that around 40 per cent of the fund was in “more unusual mid-cap” firms, whose businesses are more domestically focused, such as French retirement company Orpea and European food and drug tester Eurofins.
Telecom firms, such as Orange, Deutsche Telekom and Telecom Italia, have also been favoured by the manager and account for 11 per cent of the fund.
Mr Mitchell said the outlook for the industry was improving significantly as government regulation relaxed, leaving businesses to focus on investment opportunities rather than “cut-throat competition”.
“The companies themselves would say that they can now think about investing again because they’re not forced to face such cut-throat, brutal competition,” he added.
The Dublin-based SWMC European fund has delivered 15 per cent over the past three years compared with the Offshore Europe ex UK sector’s average return of 18 per cent, data from FE Analytics shows.