Cracks appear in the bedrock stocks
By Daniel Thomas
ft.com
Published: September 28 2007 17:10 | Last updated: September 28 2007 17:10
Bank shares look set to suffer further as a hoped-for stabilisation in the money markets has failed to materialise – and further turmoil is being caused by the Northern Rock crisis in the UK and interest rate cuts in the US. Despite a rally this week, many are worried that share prices will fall again.
“I think a recession is almost a certainty,” warns Kenneth Murray, one of the most successful investors in financials stocks in recent years for fund manager Blue Planet.
“Alan Greenspan put the chances at 30 per cent but this is underestimating it. The market is turning. People point to low price-to-earnings ratios but these are historic – I think some banks will be reporting losses by the end of the year.”
As a result, not one of Blue Planet’s 12 investment funds has any exposure to UK financial stocks – other than the option to short-sell them for profit if they continue to go down. This approach also gives Murray a luxury that many fund managers invested in financial stocks do not have: freedom to openly criticise the sector.
Some managers will admit to similar concerns, however. “Three weeks ago, things weren’t looking quite as worrying,” says Dan Kemp, fund manager at Williams de Broe. “But the uncertainty of August has been followed by the Northern Rock situation, which has added extra caution for investors sitting on the sidelines.”
Almost all fund management houses have been affected to a greater or lesser degree as most will have flagship income and growth funds heavily exposed to the banking sector.
Financials are the bedrock for many of these funds given the sector’s size as a component of the FTSE index – as well as the fact that most funds depend on the income from the dividends being paid by the banks.
It is not just those with shares in Northern Rock that have lost out, either. Those with large stakes in Alliance & Leicester and Bradford and Bingley, for example, which have both dropped more than 25 per cent in the last two months, have also struggled.
Mark Dampier of Hargreaves Lansdown names the JO Hambro, Merrill Lynch and New Star equity funds as among those beingmost “caned” over recent weeks.
Stephen Whittaker’s New Star UK growth fund, for example, has 31.8 per cent in financial stocks, with HSBC, RBS, Barclays and HBOS in its top five holdings.
Similarly, New Star’s Monthly Income Unit Trust has a weighting of more than 3 per cent in Barclays, Alliance & Leicester, Lloyds TSB and Bradford & Bingley.
It is not alone, as almost all income funds, with the exception of Invesco’s famously financials-adverse fund manager Neil Woodford, have bank stocks among their major holdings.
Some, such as JO Hambro UK Equity Income, are more exposed than others, with a top five consisting of Royal Bank of Scotland, Barclays, HSBC, Lloyds TSB and HBOS. Unsurprisingly, this has been one of the worst performing funds over the past month.
So now the question for fund managers is whether to cut their losses, or build again in the expectation that the worst is over.
Tim Scholefield, head of equities at Baring Asset Management, remains cautious. “Financial stocks have underperformed during the recent rally in equity markets. The explanation is earnings – or, more specifically, a growing realisation that the news on bank earnings will disappoint. While the bank sector to some eyes may now start to look attractive, we would suggest that there is unwarranted collective optimism among investors.”
Bears such as Scholefield and Murray say that a return to financials would be foolish – money can be made but only once the aftershocks in the system have finished.
But for every bear, there is a fund manager who is standing firm.
New Star’s Whittaker argues that the worst is over. “Things have moved at pace over the last few weeks and events have certainly dealt a big blow to banking stocks. I’m convinced the worst is past and we’ve been buying a bit in HBOS and RBS, which are safe investments.”
PSigma’s Bill Mott called the market turnround in the first week of September, saying he had added to an already overweight position in the banks, taking it from 22 per cent to 25 per cent. Including insurance companies, the fund now has 35 per cent invested in financial stocks. Admittedly, that’s made the past few weeks more difficult for Mott’s fund, but he sees these investments as cheap on a longer-term horizon.
Other leading managers are taking more cautious positions in stocks which could potentially be oversold – although none is yet choosing Northern Rock.
Ted Scott, manager of F&C’s Stewardship Growth and Income funds, for example, has reduced what he described as a “small holding” in Northern Rock to build on his position in Alliance & Leicester, where he says the excessive falls have been unjustified.
Scott’s F&C Growth & Income Fund also holds HBOS, Barclays and Lloyds, which he says will continue. However, all three funds are underweight in banks and “this is unlikely to change over the near term”.
Whether or not now is the right time to return to financials is still very much open to debate, but Fidelity’s star fund manager Anthony Bolton did much to quell fears last week when he said that he was feeling more optimistic about the market’s prospects.
Bolton said that one of the key questions facing fund managers was when to get back into financials – and added that he had already begun.
Bolton, who earlier this year predicted a financial crisis owing to excess borrowing, said he was increasing his exposure to the sector, despite remaining generally cautious. And where Bolton leads, many investors have followed, very profitably. |
