As reported last week, in the past year Lloyds share price has risen by almost 120%, though the Chancellor’s hint that Government would favour a sale of its 39% stake before the 2015 election has caught the attention of the likes of Invesco Perpetual’s Neil Woodford and Ignis’ Graham Ashby among others.
UK managers have been largely underweight the banking sector for much of the past five years, though many still hold HSBC. However, it’s interesting to note how the largely conservative industry body APCIMS has called for any bank sell off to be as inclusive as possible.
“We all want stronger, more accountable banks and surely the best way to achieve this is to ensure the widest possible range of shareholders,” said its chief executive Tim May.
Longer-term holders
“Individual shareholders are typically investors, not speculators – they tend to be longer-term holders of shares, and many take an active interest in the performance of the companies they own.”
Large scale buying from private investors would certainly shake things up, though caution still prevails.
Bill Mott, lead manager on PSigma Income, stresses that banks remain his team’s biggest underweight aside from holdings in HSBC and UBS.
He believes the biggest threat in the sector is continued political intervention in financial regulation.
“Last month Stephen Hester, who was widely thought to be making the best of a bad job as chief executive at RBS, was pushed out, apparently after a disagreement with HM Treasury,” he explains.
“It seems that Mr Osborne is not content with setting financial legislation, but wants to be involved in the strategic decisions taken by the bank. This is unlikely to be good news for shareholders. We also saw the Co-Op, once held up as a poster-child for the mutual ownership of banks, bail in its junior debt holders in a bid to raise capital. This should raise the cost of capital across the sector.”
Mott is also concerned about Barclays, where new chief executive Anthony Jenkins is looking to shrink its balance sheet.
Elsewhere, Clive Beagles and James Lowen of JO Hambro Equity Income Fund also avoid Barclays; though they are currently 12% overweight the wider financials sector.
Tarred with the same brush
“Two years ago people said you couldn’t be in financials because of the financial crisis, but they were tarring all with the same brush,” says Lowen.
“What has happened is there has been a big sucking out of capacity in lots of these sectors and the ones that are left with strong balance sheets have actually delivered. We still own Close Brothers, which has grown its bank by 50% in the past three years and it is making a return on equity of 23% because Lloyds and RBS have pulled back.”
The pair also own Investec, one of the cheapest banks available yet it is covered by only two or three analysts in London because of the complexity of the business – alongside the bank it also comprises integral asset management and wealth management arms.
Financials make up around 24% of the FTSE AllShare, so whoever you invest with, it is essential you know their views on the sector, especially banks.
Investor optimism has improved over the past six months and UK shares in particular have become more attractive, according to Core Data.
