Some fund managers have not been shy of the banking sector of late and have actively increased their exposure. Stephen Peak, manager of the Henderson UK Alpha Fund, and Tom Walker, manager of the Martin Currie North American Fund, are just two who have recently flagged their more bullish stance on the banks.
Peak believes that so far his position on the banks has paid off. He says: “The best-performing stocks for the fund of late have included Lloyds Banking Group. We initiated our position last month on the basis that its non-core book was finally starting to fade in significance relative to the very strong and well-positioned core book (which is mainly UK mortgage-related). Pleasingly, the stock has performed very well since as investors have begun to share our view.”
No longer negative
Walker on the other hand recently bought back into US banks for the first time in three years, notably regional banks such as PNC Financial Services, Fifth Third and credit card company Discover Financial Services. Having been markedly underweight, he now holds a neutral position.
Walker’s view is that the sector will return to pre-crisis norms, and that the US banking sector is in decent shape and certainly in better nick than its European equivalents. He points to the stronger balance sheets and healthier capital levels of US regional banks.
But what do the people who buy funds think of managers increasing exposure to the banks? Are wealth managers and financial planners of a similar way of thinking and can they understand the fund managers’ reasoning?
Adrian Lowcock, senior investment manager at Hargreaves Lansdown, can certainly see a brighter outlook in general for the banking sector.
He says: “There has been a large improvement of sentiment about the future of the global economy. The outlook for Europe certainly improved in the latter half of 2012, which provides relief on European and UK banks, which have been subdued because of concerns that a eurozone country might default on its debt, causing a run on the banks.
“The consensus view is that Greece will do almost anything to stay in the euro. In addition the outlook for the US economy is improving with growth returning and house prices stabilising. Finally China has also started to stabilise. All of this points to a more optimistic outlook and certainly a reduction in the risk of a full-blown eurozone banking crisis.
Lowcock can see the logic behind Walker’s increased confidence in regional banks. “US banks are a lot further down the line of recovery and regional banks are ultimately tapping into the potential of the economy,” he says.
Martin Bamford, chartered financial planner with Informed Choice, also appreciates why managers might be tempted to get in early and up their weightings in banks, though he still believes it could be a rocky ride and very much a longer-term play.
You can bank on the banks
Bamford says: “Adding to death and taxes on the list of certainties, banks will always find ways to make a profit. At a time when valuations are still depressed – as a result of their role in the global financial crisis and current concerns over sovereign debt exposure – I can understand why some managers would up their exposure to financials.
“Uncertainty is good news for investors who are brave enough to buy equities. Uncertainty in the banking sector suggests that bold investors should be buying today as long as they are prepared to hang on to see returns in the future.”
However, he stresses that the banking sector globally is a mixed bag, with quality stocks mixed in with those that have dangerously high levels of exposure to European sovereign debt.
“Fund managers will need to be selective when they are increasing their exposure and select those banks which have more conservative lending portfolios.”
Lowcock echoes Bamford’s view that managers will have to be extremely selective in a volatile sector but that the risk/reward equation could be attractive right now.
He says: “Investing in banks is a risk-on/risk-off trade. The US is further down the line in sorting out their banks with the UK and then Europe a way behind. We could see the euro situation return to the fore of investors’ minds, which will affect bank shares in the short term but a full banking crisis will most likely be avoided.
“The sector will be highly volatile but could provide a geared exposure to investors becoming more confident and tolerant of risk.”
Neil Mumford, chartered financial planner at Milestone Wealth Management, also agrees that now could indeed be an opportune time to go back into banks.
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“We have seen the likes of Lloyds go up markedly over the past six months from a low point of 20p. Over a five-year view I think the banks are starting to look reasonably good value. Banking results have been fairly opaque in recent years but you could argue that we have now had most of the bad news – PPI and so on – and that now is a good early entry point even if there are a few hidden nasties in there.”
Mumford adds: “I think the biggest issue remains the possible splitting of banks into two. If it ever goes ahead there could be a significant shake-up in the sector and maybe some hidden value as a consequence.”
However Andy Merricks, head of investments at Skerritt Consultants, is not convinced that now is an ideal entry point for managers, nor would such a move make these funds more attractive for him to buy.
He argues: “I think there are many fund managers still wary of the banks so I don’t think there is any degree of consensus on the sector at all.
“If the housing market is starting to see recovery in the US, then maybe you can see the reasoning for Walker’s position. But his recent record has not been brilliant and I think when looking at any fund right now, regardless of exposure to the banks, you would be focusing more on track record rather than where they are weighted.”
Old certainties gone
Merricks also believes there has to be a different mindset for fund managers going forward with different expectations in a different investment landscape. He thinks this applies as much to how investment managers analyse the banking sector as it does to all other areas.
“Fund managers who have worked in the markets of the ’80s and ’90s are coming to realise that the environment we are now in is totally different. We are now in an era of Japanese-style anaemic growth with no bouncing back and no V-shaped movements.
“To make money going forwards, managers are going to have to work a lot harder. Following the idea that banks will bounce back on the grounds that they always have done before will just not stand up any more.”
