Mark Barnett, manager of the £10.5bn Invesco Perpetual Higher Income fund, has revealed why he is shunning shares in all the “mainstream” UK banks, but is sticking with much maligned consumer lender Provident Financial.
Mr Barnett is generally more positive on the prospects for the UK economy in the world after Brexit, and has significant exposure in his funds to UK domestic retailers and property shares.
But the fund manager doesn’t see the big UK banks benefitting from any improved economic outlook.
He said there are three reasons why he owns no UK FTSE 100 bank across any of his funds.
The first reason cited by Mr Barnett is regulation. He said: “Regulation remains tight in the sector and has become tighter in recent years. It may be that it doesn’t get any tougher from here, but I don’t think it will get any easier.”
The second reason he cited is competition. He said price competition in many of the markets in which banks operate is intense, with new entrants driving margins downwards.
“Many investors are very bullish about the margins the banks can achieve in future, we are more cautious on that,” he said.
He pointed to banks moving away from the mortgage market, where growth is low, into unsecured consumer lending and motor finance, "which are exactly the types of lending the FCA are concerned about”.
Mr Barnett’s final reason for being cautious on the outlook for the UK banks is the interest rate environment.
The fund manager said “current economic conditions” mean it is unlikely interest rates will rise “significantly” from here, and he said banks have historically derived returns from borrowing for the short-term and lending for the long-term.
But low interest rates reduce the gap between those numbers and the profits banks can achieve.
In contrast, Mr Barnett remains keen on the shares of embattled lender Provident Financial.
The company issued a major profit warning and the shares have dropped from £31.06 to £7.90 over the course of the year to 12 October.
Mr Barnett said he is “very very close” to the company and has been to visit the headquarters in Bradford to meet the new management team.
The fund manager said the market has been spooked, in addition to the profit warning, by news the FCA is investigating a part of the credit card business operated by Provident.
Mr Barnett said the issue is “significant” but that he expects a resolution by the end of the year, and said the impact will be better than the worst fears of market participants.
He said it may take a year or two for profitability to return, but the returns will justify such patience.
Provident Financial cheered up the market with a trading update on 13 October, in light of which its shares rose 12 per cent.
Mr Barnett's rival and former Invesco Perpetual colleague Neil Woodford is another investor who is sticking with Provident shares in the belief that the market has over -reacted to the bad news surrounding the company.
Francis Brooke, who runs the £3bn Troy Trojan Income fund, said he is also staying put with Provident Financial shares following a recent meeting with the chief executive.
Brian Dennehy, who runs IFA firm Dennehy Weller in Chiselhurst, Kent, said he is not advising clients to invest in Mark Barnett’s funds, due to recent poor track record.
David.Thorpe@ft.com
