Some investors expect the market to bounce back while others play safe – but with financial stocks at low valuations, the question of when to reinvest in the sector grows more pressing.
Financials have plummeted in both performance and investor sentiment since the credit squeeze began last summer. Now, with valuations low, the question of when to get back in is becoming louder.
The Adviser Fund Index (AFI) contains only one financials fund – the £841m Jupiter Financial Opportunities fund, listed in the Cautious AFI – since the £351m New Star Global Financials fund was ejected in November’s rebalancing.
Mark Hinton, research analyst at Bestinvest, does not hold a financials fund in the AFI but says he might consider doing so at the next rebalancing in May. He explains that he primarily looks at the best funds within an asset class, rather than sector allocations.
“I don’t look at how much financials I should have,” he says. “It’s [about] the best funds within that asset class. The more tactical portfolios might include a financials fund, but it would be at a fund level. It could be an interesting area in the next reshuffle, but probably for the aggressive portfolio because you are taking quite a view on the market.”
By reinvesting in financials, which largely consists of banks, an investor is taking a view that the market will bounce back rather than fall into recession, says Hinton. However, some managers say it is too early.
“You have a variety of views on that sector,” he says. “In general I think [the view] is quite cautious at a fund manager level. But it depends on the strategy. If it is quite an aggressive fund they might be buying back into banks now. It also depends on how confident the manager is in that sector.”
Hinton says he would consider the Jupiter Financial Opportunities fund for the Aggressive AFI. Philip Gibbs has managed the fund since its launch in 1997 and, according to Morningstar, it ranks fourth out of seven financial funds in the IMA Specialist sector over three years to December 17. It is fifth out of eight funds over one year and third out of eight over six months.
Over one year the fund fell 0.8% compared with the sector decline of 1.47%. Over three years it returned 57.6% compared with 55.2%. Over six months it produced a negative return of 7% compared with a sector fall of 7.5%.
The New Star Glo-bal Financials fund, managed by Guy de Blonay, is ranked first out of seven funds over three years, according to Morningstar.
Out of eight financial funds listed in the IMA Specialist sector it is first over one year and third over six months.
Over one year it returned 7.8%, while over three years it grew 98.2% compared with an average return of 55.2%. Over six months it fell 3.7%.
Jonathan Wallis, head of retail fund research at Allenbridge Group, has held the New Star fund in his Balanced AFI portfolio but removed it in November because the outlook for financials was uncertain.
“When the credit crunch blew, we reduced our exposure to that sort of area,” says Wallis. “The New Star fund has held up pretty well. But our view generally is that the sector is going to struggle for a while. It will take time to work through. It is too early to dive back in.”
Wallis, like Hinton, says that views on the outlook for financials are mixed. Some fund managers, such as Richard Buxton at Schroders, are buying back into banks, while others say it is too early.
“There’s still a fair degree of uncertainty in the area as a whole,” says Wallis. “It is a mixed picture.”
The New Star fund is Wallis’s preferred financials fund, and he will revisit it. “We still rate the manager,” he says. “In the long term I’m sure it’ll be fine. Guy de Blonay has proved to be astute.”
At the end of October, the New Star Global Financials fund was 47% invested in banks, 31% in general financial and 10% in real estate.
The fund’s largest geographical weighting was in Britain, where 17% was invested.
Kypros Charalambous, investment manager at Gerrard Investment Management, does not have direct financials exposure but gets access via funds that have weightings to financials, such as Buxton’s Schroder UK Alpha Plus fund. “Rather than hold a dedicated financials fund, we let the managers do it themselves,” he says.
“We see [financials] as a long-term opportunity,” says Charalambous. “The short term is dominated by sentiment and the actual valuations on stocks may or may not be accurate. Nobody quite knows where this is going to end.
“We acknowledge there could be more bad news going into the first half of 2008,” he adds, “but long term it’s an opportunity. The issue at the moment is sentiment and where it is going. As a house we are still fairly positive. We don’t think we’ll see a global recession.”
As well as holding the Schroder UK Alpha Plus fund, Charalambous says he would consider adding the £364m JO Hambro UK Equity Income fund if he wanted to play the financials theme. At November 30, the largest sector weight in the JO Hambro UK Equity Income portfolio was financials, at 37.3%.
The Adviser Fund Index Series – A SummaryThe Adviser Fund Index series comprises an Aggressive, Balanced and Cautious index each tracking the performance of portfolio recommendations from a panel of 19 investment advisers. For each risk profile, all panellists specify a weighted portfolio of up to 10 funds from the authorised UK unit trust and Oeic universe that, when aggregated, define the constituents and weightings of the three AFIs (see ).