The Royal London European growth trust has gone overweight in banks. Fund manager Kevin Lilley says he been aggressively underweight in the sector down to a seven per cent position on September 18 but says he moved overweight on September 26.
He says that while there is a risk of an individual bank blowup, he believes he can mitigate this by spreading the risk and this should see his fund benefit from an improving situation.
Lilley says: “We have recently seen a 50 basis point cut in US interest rates and an improvement in credit conditions. Libor rates have fallen, M&A activity is picking up and the IPO new issues have started up again. When I look at the fund management surveys, I see that the banking sector is the most aggressively underweighted sector in every region of the world, which means funds are unlikely to go further underweight, but more likely to close some or all of their underweight positions into an improving situation.
“A lot of bad news has been absorbed by the market over the past few weeks, so a lot of negativity is priced in. As a result of these factors I have decided to reverse my recent strategy and move to overweight the banking sector, from being underweight all year. Whilst there may be an individual bank blow-up I have bought a selection of stocks to spread the risk, and I think the sector may be squeezed higher from here.”