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Financials don’t add up

John Kenchington finds that financials funds were caught out but are now feeling more confident of a brighter outlook

Financials funds have put in a poor performance this year as even the best players have been caught out by macroeconomically-driven market volatility.

The main funds all underperformed the FTSE all share financials index which is up by 7 per cent in 2010 so far, according to Morningstar. Axa Framlington financials is up by 0.2 per cent, Fidelity’s offshore global financial services fund is up by 2.4 per cent, Swip financial is down by 1.7 per cent and Henderson global financials is down by 2.5 per cent. Even the £1.1bn Jupiter financial opportunities fund managed by Philip Gibbs and Guy de Blonay has put in a rare period of underperformance with a 4 per cent fall.

The managers say they underestimated the impact that government stimulus measures would have on financials stocks. They were defensive, with cash positions as high as 50 per cent, as fundamentals pointed to a sustained bear market in financial sector stocks. But governments kept interest rates low and delayed regulatory curbs to allow the economically sensitive financials sector to recover.

De Blonay told Money Marketing the managers had now adopted a 90 per cent weighting to equities as they have accepted governments will do whatever it takes to ensure the stability of the financial system. He says the macroeconomic picture remains fragile but markets can expect more quantitative easing from global governments as they vie for monetary expansion. He says: “We are slightly more bullish than we used to be. Corporate profits and high growth areas will continue to surprise. Luxury goods sales forecasts are being guided upwards. Most of the profit growth is coming from emerging markets.”

Henderson’s £81.9m global financials fund manager Emily Adderson, who took over running the fund from De Blonay when he joined Jupiter this year, says the top-down picture is becoming clearer.

Countries such as the US and UK have firmed up the terms of reforms of the banking system and European regulators have issued the results of the bank stress tests, she says.

The Basel II legislation that threatened severe curbs on the banking sector has been delayed until 2018 and the most draconian elements have been removed.

Adderson says: “You can now do bottom-up analysis of companies within the peer group and see where the opportunities are. It should become more of a stockpicking environment and over the next 12 months we are confident.”

But she cautions that, in the near term, “you cannot take away from the fact that this is a macro-driven sector”.

She says: “In the near term we still feel there are overhangs in the macro environment and believe there will have to be more stimulus measures.”

The £48.2m Axa Framlington’s financial fund had its A rating from research agency OBSR removed in early July following sustained lacklustre performance. OBSR analysts said: “In its current structure, we have reduced conviction that the fund can add value over the long term.”

Chelsea Financial Services managing director Darius McDermott, says when it comes to financials funds he would “never look elsewhere” than Jupiter. He says: “I have got enormous confidence in that team. Philip Gibbs is brilliant at calling these macro markets and Guy de Blonay is a very good financials manager.”

Jupiter financial opportunities has an industry-leading return of 732.6 per cent from launch in June 1997 to June 30 this year, compared with 33.8 per cent from the FTSE all share financials index.

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