Nice mention in an article at yahoo
'Financial services stocks have been real leaders of the bull market in the US for ten years now,' says James Ellman, fund manager of the AIM Global Financial Services fund (NASDAQ:GFSAX - news) . 'And they will continue to lead the market upward.'
The Aim Global Financial Services fund has 90% of its assets in financial services stocks encompassing all areas - banks, brokerages, insurance companies, leasing companies, credit card companies, and mortgage brokers.
Between 75% and 80% of the fund's assets are in stocks based in the US, 15% in foreign companies, and the remaining 5% to10% is in cash.
The fund began in mid-1994 and has had positive returns every year running. The three-year average return is a healthy 24%, and currently, the year-to-date return is 19%.
Ellman says that the US banking is one of the least consolidated industries and that we are only at the beginning stages of the process. He notes that in the US, there are still roughly 10,000 institutions, whereas in Canada there are eight, in the UK 10, and in Japan 20.
He also says that technology plays a major role for all financial services companies.
'Technology has had a great effect on the financial services industry, more so than any other industry,' he says.
'Financial services businesses don't really make anything. They are factories that manipulate information,' he continues. 'Technology allows for the better manipulation of information. All non-interest expenses can be eliminated with the scalability of computer systems.' He notes how we have now replaced human capital with computer capital.
Another factor that makes him bullish on bank stocks is a massive shift upwards in the age of the population in G7 countries. As a result, there is an increased need to save for retirement.
'Companies in the business of providing savings management advice have seen strong growth,' he says.
Also of importance is the strong regulatory and monetary environment in which we now live. The power of central banks to keep inflation low has been key for financial institutions.
'When inflation grows and asset quality goes bad, banks and insurance companies go belly up,' says Ellman.
The Fed's ability to ensure a stable monetary environment has resulted in a stable pattern of earnings growth for financial institutions.
AIM focuses on what Ellman calls earnings momentum. He looks for companies that have three things: consistent earnings growth, low PEG ratios (P/E ratio divided by growth) that will allow for P/E multiple expansion, and earnings estimate revisions, or earnings surprises.
'There is a better than 50% chance that if there is one surprise, there will be another,' he says. 'When a company misses earnings, we simply sell the stock.'
'The average financial services company earns two times the earnings of the market, but on a lower multiple,' says Ellman. 'There is still a significant distance between the overall market and financial services stocks.'
Ellman explains that over time this difference should disappear which means that there is much growth potential for financial services stocks. 'In fact, the P/E's are starting to catch up,' he notes.
Ellman is a big proponent of the credit card banking area. He notes that today asset quality is much better as bankruptcies have been declining. The cost of funds has also improved as short term interest rates have moved lower (a credit card company borrows in the short end to fund its lending activities).
There has also been much consolidation in the industry with many regional banks selling off assets in non-related geographic markets. This allows companies to more fully focus on their core markets.
Ellman has some favorites in the industry, most notably Providian Capital (NYSE:PVN - news) , American Express (NYSE:AXP - news) and Cap One Financial (NYSE:COF - news) .
Ellman also likes the electronic commerce banks. 'We've been long term holders of Telebanc (NASDAQ:TBFC - news) since the IPO,' he says. 'It's one of our largest holdings.'
Another favorite is Knight/Trimark (NASDAQ:NITE - news) . 'It's a super simple business with no retail customers,' says Ellman. The company's business is broker execution of stock trades for the likes of E*Trade (NASDAQ:EGRP - news) , Waterhouse Securities (NYSE:TD - news) , and Quick & Reilly.
Ellman explains that today's high volumes and high volatility has been driving the company's business. He also adds that Knight/Trimark has had very strong earnings surprises.
When asked specifically about E*Trade, Ellman commented, 'E*Trade doesn't fit our model. The PEG ratios are so high, therefore, you need very strong surprises to get the P/E expansion we want.'
Outside the US, the fund has investments in Ireland, the UK, the Netherlands, France, Spain, Japan and Hong Kong. Ellman mentions Ireland as one of his favorite areas of the world.
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