“We remain disenchanted with the outlook for the large incumbent banks,” Jan Luthman, macro fund manager, revealed.
The Liontrust Macro Equity Income Fund’s industry allocation shows a 9% overweight to financials versus the FTSE All-Share weight of 24.8%. This could lead investors to conclude that the fund managers hold an upbeat assessment of the outlook for banks, its largest component.
But according to Luthman, breaking the financials down to the next sector level – so banks, insurance, financial services including asset managers and real estate – gives a clearer picture of the fund’s exposures.
“We have a large underweight to the banks sector,” Luthman points out.
Banks account for 0.9% of the fund, compared to 11.3% FTSE All-Share Index. Meanwhile insurance accounts for 4.6% of the fund, versus 5.6% FTSE. Financial services measures up to 22.3% of the fund, compared to 5.5% FTSE, and real estate equals 5.6% of the fund, versus 2.4% FTSE.
Commenting on the real estate allocation, Luthman noted that the theme is a minor one and the team is continuing to reduce it in the portfolio. For this reason, the real estate section is split out from the financials section in the Liontrust fund factsheets.
“The fund holds shares in three commercial property companies. We see this as belonging to an entirely different theme – the attractions of prime London property, particularly commercial property, to overseas companies that view the UK as a bridgehead into Europe,” he said.
Banks
The team’s macro perspective on banks is muted, largely due to political uncertainties.
“We view this government and the opposition as determined to reduce their size and the systemic risk that they represent. Balance sheets remain obscure, and it is not clear what further steps may be taken by the government and regulators to bring about the ‘cultural shift’ that they claim they wish to see,” Luthman said.
These policies contrast with the encouragement being given to establish and expand new, smaller, ‘challenger’ banks. In particular, political support is being given to the expansion of lending to employment-creating small and mid-sized enterprises.
“Although tiny in relation to the incumbents, the challenger banks are expected – and indeed intended – to reduce the market share of the incumbents, while competitively lowering fees and eroding margins,” Luthman noted.
Asset and wealth managers
As the world trundles along in a slow economic recovery, good levels of liquidity, low interest rates and a global thirst for yield suggest that companies could be on the prowl to snap up acquisition deals. As global recovery begins to take hold, interest rates could begin to firm, and bond prices start to weaken.
“In the near term at least, we expect corporate earnings growth to be driven more by acquisition followed by rationalization, than by economic expansion or capital investment,” according to Luthman.
Current low borrowing costs mean that hurdle rates for acquisition will be low, and the opportunities for earnings enhancing acquisitions will be considerable.
“We believe the asset and wealth management sectors will profit from rising equity markets – and the associated higher fees and inflows as investors reallocate away from fixed income,” he added.
