Fund stalwart hones portfolio for success

30 November 2009 | By Muriel Oatham

Emily Adderson is the manager of the Henderson New Star Global Financials fund, which she took over in October 2009. She has been at New Star and then Henderson since April 2004, and was appointed assistant manager of the fund in December 2008.

Q: What changes have you made to the fund since taking over as its manager?

A: I have worked on the fund for the last three-and-a-half years with Guy de Blonay, latterly as assistant manager. This meant that, on taking over the fund, I knew the portfolio very well.

My first decision was to reduce the number of holdings in the portfolio from 100-110 to 70-90, bringing it closer to the number of stocks the fund has historically held. This enabled me to focus my thinking and get the most out of the returns from the stocks I wanted to hold.

Q: What are your investment themes for next year?

A: I have three key investment themes. First, the combination of low interest rates and the huge amount of liquidity in the market means that fundamentally it is a very favourable environment for financials. Second, emerging markets will be a key growth area and third, there are a number of banks with strong balance sheets who are now positioned to outperform.

 

Q: Which companies will benefit from the favourable market for financials?

A: In developed markets, investment banks will be strong performers. However, I think there will be a shift away from the spread-based returns we have seen from currency and fixed income investment towards equity-driven returns, generated by merger and ­acquisition [M&A] activity and stockmarket listings. In this environment, I expect the specialist advisory boutiques to do particularly well.

And asset managers will see their share prices rise, as equity markets continue to recover and retail investor confidence returns.

Q: Where are the main growth areas for financials in emerging markets?

A: The key growth areas are China and Latin America. China is a fundamental structural growth story, with GDP forecast to increase for the next 10 years. It has a well-positioned government and significant reserves, which are being invested into the economy, particularly through major infrastructure projects. This investment feeds directly through to the large, state-owned banks.

”One major driver of banking growth, particularly in Brazil, is home ownership”

While the banking market in Latin America has underperformed for some time, this is changing. Currencies are stabilising and countries are generating their own funding capabilities. One major driver of banking growth, particularly in Brazil, is home ownership. Rising household income and the demographic shift towards an emerging middle class is opening up the mortgage market.

Q: Which bank stocks do you like?

A: I like banks with strong balance sheets, generated from either deposit bases, war chests or cash generative businesses, who are now using this cash to fund specific acquisitions or are repatriating it to shareholders.

One example is Banque Cantonale Vaudoise, a Swiss regional bank. It is predominantly exposed to the Swiss mortgage market and is hugely cash generative with a strong deposit base and balance sheet. This is enabling it to conduct share buybacks and pay special dividends to investors, and it is yielding 8-9%.

Another example is DnB Nor, a Norwegian bank which launched a speculative rights issue in September. It has used the proceeds from this to shore up its capital position. This means it is well-positioned for expansion, either via acquisition or simply by taking market share from underperforming peers.

I also like the successful restructuring stories - those banks which were able to pick up quality assets during the collapse of competitors, such as Barclays’s acquisition of parts of Lehman Brothers and Banco Santander’s takeovers in British retail banking.

Q: What are your views on British banks?

A: I hold Lloyds Banking Group, which I prefer to RBS. I think RBS has its hands tied in terms of what it will be able to do, at least until after the general election, and it will remain the scapegoat of the banking crisis.

Lloyds has done well to come out of the government asset protection scheme. Its new ‘contingent capital instruments’ [a bond security which can be converted into equity if the bank’s core capital falls below 5%] are an interesting product, offering attractive rates for investors.

I do have concerns about Lloyds’s exposure to the British consumer, given its market share, and whether it will be able to significantly change its funding base to move away from the wholesale capital markets. But at the moment I am happy to be invested and am waiting for its rights issue to price.

Q: What are your views on insurance stocks?

A: Insurance is not a big theme in the portfolio. On the non-life side, it has been a benign year for catastrophe claims, which means that insurers will not be able to raise prices significantly in the renewal season. This leaves few drivers for outperformance. And life insurance remains in a recovery phase. There are no near-term fundamental growth drivers and returns remain low.

“In a low interest rate environment, there are few opportunities for significant gains”

While, with a few notable exceptions, insurers were positioned very well throughout the financial crisis, they typically invest in government debt and corporate bonds. In a low interest rate environment, there are few opportunities for significant gains.

However, I do hold Prudential, because of its exposure to the Asian market. While others are trying to break into this market, Prudential is long-established in Asia, and its valuation remains attractive.

Q: How well do you think the financial services sector has recovered?

A: Back in February and March, there was hugely significant risk in the financial sector. Without the intervention of governments and central banks we would have seen more financial services companies fail. Investing in this sector in March took a lot of belief in both the speed and size of government response to the crisis.

While we have undergone a huge recovery, this is still in its early stages with a long way to go. But compared with historical multiples, prices in the sector are still attractive. The focus now is on stockpicking, looking for companies with strong fundamentals in terms of growth, restructuring and recovery.