Greater scrutiny
Prior to 2008, financials, and banks in particular, had incredibly complex balance sheet structures.
Since 2008, banks have been under great scrutiny and with the introduction of increased regulation through asset quality ratios, alterations to Basel solvency levels, capital adequacy controls, the troubled asset relief programme, rights issues and contingent convertibles, they now have stronger balance sheets and less complex business models.
There is an argument that banks will be much more utility-like in future and that, with stronger balance sheets and less speculative operations, the opportunity for having less capital-intensive operations opens the doors for greater dividends.
Banks have come under increasing pressure during the past few years. High-profile wrongdoings at many leading banks, including JP Morgan, Goldman Sachs, Citigroup, Barclays, Wachovia, HSBC, Wells Fargo and, most recently Deutsche, have been massive and each have rocked the industry.
Since 2008, more than $200bn in fines have been levied at the industry and yet it both survives and manages to make profits; in some cases record profits.
Banking has changed, and hedge funds, venture capital, private equity, asset management, crowd funding, blockchain, challenger banks and others will fill the gaps left by the withdrawal of the traditional banking model.
It is incredibly exciting for the profession as the world of high finance continues to reinvent itself in order to meet the demanding needs of its clients.
Uncertainty creates opportunity, and there is incredible potential for the financial industry beyond the rise of the disruptors and the new entrants.
‘Robo-advice’, for instance, was unheard of two years ago and PayPal is now listed on the Nasdaq stock exchange with a market valuation in excess of $50bn (£41bn).
It is not even 20 years old and yet has moved more than $200bn, has over 15,000 employees and is a household name.
On the other hand, traditional financial businesses are undergoing a transformation. Although there are still issues relating to many banks, such as the UK government’s ownership of Lloyds and the Royal Bank of Scotland, which means they are still not totally operating within the private sector, it is easy to see the direction of travel.
As previously mentioned, legislation is forcing them to change their capital structure and balance sheets. This creates opportunities for both equity and debt managers.
From a debt perspective, look at the returns achieved from the Blackstone/GSO Loan Financing fund this year; this specialist fund invests in collateralised loan obligations and has delivered healthy returns in both capital and income terms.
Carador, Volta Finance and Fair Oaks Income have all offered investors significant returns this year for investing in the same space. When looking in the unitised space, the choice remains limited, although there are specific debt funds investing in financial companies such as Invesco Perpetual, Pimco and Axiom, to name but three.
On the other side of the coin, there are two ‘pure’ closed-ended equity opportunities: Polar Capital has its Financials Trust, for example, and there is also Blue Planet, both of which sit on a discount to their net asset value.
In the open-ended space, offerings from Axa Framlington, Aberdeen and Jupiter could be interesting to look at.
