Banking zeroes to heroes
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A mere 12 months on and some of the best equity returns in countries such as the US and the UK - the worst- hit in the crisis - are coming from the very entities that caused the bear market in the first place.
Tech and real estate, the catalysts for previous bubbles, never showed such strong resurgence just 12 months after collapse. But then the disaster befalling those assets did not have the same initial impact either. Nor did it have the same level of government support to bail those companies out of the hole they dug themselves into.
Investors in most financials funds are still sitting on losses over a full year but, year to date, their performance has been strong. JP Morgan global financials is up by 22.4 per cent, Swip financial has gained a similar amount and Henderson New Star global financials has made 20 per cent.
Jupiter financials opportunities is one exception to the full-year losses in this sector. Over 12 months to September 3, the fund has gained almost 30 per cent, according to Trustnet figures, having sheltered in US treasuries and cash in the midst of the banking crisis storm. It is that macro and absolute return mentality during the worst-ever year for his sector that has led Jupiter to plan two new onshore unit trusts for Philip Gibbs.
Subject to FSA approval, Jupiter intends to launch an international financials portfolio, which will utilise Ucits III rules in order to short stocks and areas of the market Gibbs is bearish on. The second - a global macro fund - will be a go-anywhere- style portfolio and include assets and sectors outside of equities and financials. There is to be no change to his existing flagship, fin opps portfolio.
The international financials fund will be managed in a similar style to Gibbs' global financials Sicav, which at the moment is more than 50 per cent positioned in banks but is likely to have more in small caps than the financial opportunities unit trust. Seven of the top 10 holdings in the offshore fund are either US or UK banks, with his top three positions in JP Morgan, Bank of America and Barclays. Fin opps also has its heaviest weightings in these three stocks. Gibbs is not alone in his positive stance on the banks.
A year ago, banks were toxic to hold as share prices plummeted to lows rarely, if ever, seen before. Today, most financials managers see this as one of the key opportunities for investment and already many of the blue-chip banks have seen their share prices double in a matter of months.
Gibbs, Henderson New Star manager Guy de Blonay and Sanlam global financials manager Kokkie Kooyman all favour banks in the UK and US.
Among the top holdings for De Blonay are Barclays, Lloyds and Royal Bank of Scotland while he has also been exposed to investment banks such as JP Morgan, Goldman Sachs and Bank of America.
Kooyman, who runs the Dublin-domiciled Sanlam fund which the group is currently starting to promote to UK retail investors, currently has 71 per cent of his fund in banking stocks. He too has exposure to JP Morgan, Bank of America and Barclays. Kooyman does not typically hold bigger companies, preferring the smaller end of financials but as mammoth banks fell in price he found opportunities there attractive. He has taken his portfolio to a 50 per cent weighting in bigger companies, one of his highest levels to that market cap in the 10 years he has managed the fund.
Kooyman believes that despite the recent rally, there remain significant opportunities in financials and banks over the coming years. Many companies are still a long way off their typical historical value and if investment is made in the financials sector now, he feels investors could double their money over the next five years.
"The value in many companies unlocked quite rapidly but there is still more to come. For example, JP Morgan and Barclays both made big acquisitions and it takes about three years before cross-selling and true synergies in the businesses occur, so the value will continue longer than people think," he said.
Despite the somewhat bullish outlook and stance of some fund managers on banks at the moment, the picture is not entirely rosy just yet. Kooyman asserts that while a lot of the uncertainty that existed a year ago is behind us, there remain risks for financials.
He points out UK and US banks remain heavily in debt and there could still be a few surprises. "Transparency has not improved so much but managements of these companies are in greater control than they were before. As macro conditions improve, what the company managements tell you is more believable these days," he said.
Gibbs has geared his portfolios for continued recovery. "In spite of recent gains, financial stocks are generally still priced for a difficult market environment and should continue to appreciate in value as business and consumer confidence improves. Ultimately, there may be problems ahead such as government cutbacks and interest rate rises but we believe recovery should be the focus for now."
De Blonay echoes these sentiments and says he is more optimistic today that the recovery will take hold, but not without some volatility. "A month ago, I was very bullish but as August was one of the best months this year, I do think there will be some sort of pullback," he added.
There is no denying the volatile and difficult year this specialised sector has had. But its appeal today has never been greater as investors scramble to take advantage in the uplift recovery is having on these once depressed shares.
With mainstream equity managers now starting to sing the praises of bank stocks, the investment opportunities a year on from the banking disaster have come full circle.
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