Manager focus: Philip Gibbs

The British banking sector is looking incredibly cheap now that it has fallen by more than half from its peak, according to Jupiter’s Philip Gibbs.

Speaking in a conference call for investors, the manager of the £1.3 billion Financial Opportunities fund said he has reduced his high cash weighting down to 10% and deployed assets back into the sector.

“The financial sector has come off a long way and has been heavily de-rated. Since 2006 to 2007, by historical standards we are very low – the sector has come off more than 50% from the top,” he says. “So it does rather hit you in the face as something that is particularly cheap.”

Gibbs emphasises the need to look at other factors than valuation and earnings growth when selecting banking stocks, however.

“In mid-2007 I was able to challenge the assumption that banks’ earnings were going to be good, because of overleveraged consumers and rising interest rates. People underestimated the impact of a big interest rate movement. It is about quality of earnings as well as buying on low P/Es,” he says.

In the 31-stock portfolio’s top 10 holdings are Bank of America, Barclays, HSBC and JPMorgan Chase. Of these, Barclays is the largest, making up more than 7% of the fund. Gibbs says he believes strongly in conviction investing. “There is nothing worse than having a good idea and not being able to make proper money out of it,” he says.

The fund is biased towards investment banks, which Gibbs says tend to have fewer capital problems and are set to benefit from the rise seen in the equity market since March. “There is a good case for investing in more capital hungry banks, and in more universal banks like JPMorgan and Barclays,” he adds.

He also holds life assurance stocks, general financials, and some real estate.

The banking sector will rise if economic recovery proves to be sustainable, the manager says. “If recovery continues, I do not believe share prices will stand still, I believe they will go forward because people are very defensive on how they are looking at the financial sector.

“I think if the sector returns to more normal valuation parameters it will stage a further significant rally of more than 20%, and within that individual stocks could do extremely well.”

Even if Britain’s nationalised banks are re-privatised in the future, they will remain a good buy, Gibbs says. “One of the main things the regulator will do as a result of this crisis is to put capital regulations on banks. Higher capital requirements do not mean the sector can make no progress. Capital raising doesn’t mean you shouldn’t invest in banks or that there is not good value there.”

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