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Rock weighs heavy on fund firms

The crisis at Northern Rock has had massive implications for fund managers as they consider their next moves, report Chris Salih

The dramatic fall in Northern Rock’s share price in the past few weeks has led to fund managers having to make a call on whether to to stick with the bank.

Baillie Gifford, Scottish Widows, F&C and Lazards are among the top 15 shareholders of the bank and have been faced with some big decisions on Northern Rock and the banking sector in general.

F&C fund manager Ted Scott had exposure to Northern Rock in his Stewardship income and growth funds.

Scott has called for calm across the banking sector and says it is important to recognise that Northern Rock has a different business model to many lenders, as the majority of its lending was funded from the wholesale money markets.

He says: “The Stewardship growth and income funds had a small holding in Northern Rock. We are reducing our holdings to build on our position in Alliance & Leicester, where we believe the excessive falls were unjustified.

“In the F&C growth and income fund, which has a broader investment universe, we hold HBOS, Barclays and Lloyds. With a much broader business and limited exposure to the wholesale money markets, these, as well as other banks are much more resilient to the rise in inter-bank lending rates and the associated credit squeeze. We have been underweight to the banking sector across all three funds for some time, which is unlikely to change in the near term.”

Jupiter chief executive Edward Bonham Carter agrees that Northern Rock’s model has made it more vulnerable to a credit squeeze but considers that the bigger question is what happens to the banking system.

He says: “We cannot say what will happen next to Northern Rock but the broader issue here is one of confidence in the UK banking system. The Bank of England has made it clear that it has no intentions of bailing out reckless investors but it will step in to provide funding to limit any damage to the economy.

“One cannot predict the exact timing of a full resolution of the problem. However, we believe that we are facing an investment outlook that comprises lower economic growth and falling interest rates, especially in the US, which will make equities an attractive asset class. However, the probability of individual shortfalls in corporate earnings will rise and fund managers need to make greater distinctions between individual companies and sectors.”

Scottish Widows Investment Partnership has a 3.28 per cent position in Northern Rock, with funds affected such as UK income and UK equity income run by Richard Dunbar.

Lazards has a 3 per cent Northern Rock stake, with Alan Custis and Tony Willis holding the bank within heir UK alpha and UK omega funds. Lazard’s managing director Charlie Wilson says that the speed that the bank grew justified having exposure to it.

Rensburg UK blue-chip growth manager Colin Morton also held the stock but sold after Northern Rock’s chief executive Andrew Applegarth failed to convince him following a conference call.

Morton believes that as Northern Rock is so dependent on wholesale lending, market conditions mean it is unlikely to mount a quick comeback and restoring investor confidence is a completely different task.

The worst affected Baillie Gifford, which at one point had around 200m wiped off its investment through its 5.98 per cent holding, which it is understood to have sold.

Hargreaves Lansdown head of research Mark Dampier believes that most firms will either have sold out or trimmed down their exposure to Northern Rock. He says: “There does not seem to be a great rationale for keeping the bank but some will not be so keen to jump the gun as Aberdeen survived when a lot of people did not think it would. Much may depend on whether any suitors come in to look at buying the bank.”

Should advisers steer clear of banks altogether, particularly with Alliance & Leicester and Bradford & Bingley also seeing sharp share price falls, or should concern remain isolated on Northern Rock?

PSigma income manager Bill Mott is still bullish on banks, having raised his overweight from 22 to 25 per cent, and says there may still even be an opportunity to buy Northern Rock as he believes the Bank of England’s intervention marks the bottoming out of the recent problems.

He says: “We are watching the situation closely with regard to Northern Rock although we are not buying it today. It may have some attractions for us in the near future. Our increased overweight was driven by the fact we believe the banking sector offers outstanding long-term value and we believe that we are close to the bottom of negative sentiment in this sector.”

Dampier says it would ludicrous for investors to try and avoid funds with Northern Rock and financials in general in them.

He says: “Fund managers get it wrong now and again and while Northern Rock was not a great buy in my opinion, financials is too big a chunk of the market to avoid, unless you are Neil Woodford.”

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