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Financials time

If you were making a list of the most successful fund managers during the past 10 years, then Philip Gibbs’ name would be near the top.

He has provided a return of 688 per cent from his Jupiter financial opportunities fund and remember that this period includes a pretty severe bear market.

The bear market of 2000 to 2003 took the fund’s benchmark (FTSE AW Financials) down about 30 per cent, so the fact that Mr Gibbs’ fund actually rose by 21 per cent is remarkable.

When the fund launched 10 years ago, I recall there was a great deal of scepticism about the concept.

Why? Because a number of building societies at the time were demutualising, including the Halifax, and some journalists were suggesting that people should keep their shares and not buy the unit trust.

Well, of course, it is easy to be a millionaire with hindsight, but if investors had sold their demutual-isation shares and put the money in Mr Gibbs’ fund they would be extremely pleased today.

Despite Mr Gibbs’ tremendous investment success, he is still not well known. I think this is largely because sector-specific funds have not been as popular as general funds, which is why the likes of Neil Woodford, Tony Nutt and Anthony Bolton are much better known.

I believe too that many of us felt that sector funds were too specialised for the majority of our clients.

There is a grain of truth in this but of course the definition of financials (at least for Philip) is really quite broad. It ranges from property shares to life insurance and investment management groups.

In other words, the sector is highly diversified and this has enabled Mr Gibbs to vary the portfolio and take advantage of various mini cycles.

More recent performance, however, has not quite lived up to those exceptionally high standards.

Following the market correction on May 10, 2006, the Jupiter financial opportunities fund had its worst period of relative performance since its launch. The market weakness also caused the fund’s overall price/ earnings ratio to fall from 12 to 10 in a short space of time without any major newsflow.

There has not really been much place to hide from the current market volatility and concerns over inflation and interest rates which clearly have a very direct effect on financials.

But while Mr Gibbs has been slightly cautious in the short term, he is actually very bullish on the longer term.

He believes that the interest rate concerns in the US have been overdone, and that concerns over both the housing market and the US consumer will cause the Federal Reserve to start moving interest rates downward.

Once this happens, he believes that financials will see an immediate benefit.

The fund currently has a bias towards European companies, particularly banks. Europe makes up 62 per cent of the portfolio, but surprisingly the Eastern European exposure is very small, currently 4 per cent in Turkey and 1 per cent in Russia.

Exposure to Japan has also increased following the market weakness and that country now makes up 10 per cent of the fund. This might not seem much compared with the European position but a year ago he had a zero position in Japan so that is a big move.

Mr Gibbs is not particularly keen on the UK, an area where in the past has held more than 40 per cent of the portfolio. Currently, it is only 17 per cent of the fund, since he believes p/e compression makes UK financials particularly unattractive, especially the banking sector.

In addition, he believes that the strong rise in UK property shares has left them looking vulnerable, with yields too low to justify buying.

One area he does like is UK life insurance, as he believes this still has some growth characteristics in an area there has to be a stronger secular change in savings habits.

The fund is now about £900m in size. Liquidity does not seem to be a serious problem, although it is interesting to note that Jupiter did launch a global financials Sicav for Mr Gibbs only about six months ago. This could take some of the pressure off the bigger fund and also enable Mr Gibbs to buy into one or two smaller positions.

In summary, Philip Gibbs still believes that there is strong earnings’ potential in the sector, plenty of M&A activity and huge potential in emerging markets.

The fund very much remains on our own Wealth 150 list and is a big holding in my own Isa.

Mark Dampier is head of research at Hargreaves Lansdown.

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