Mark Costar, the lead manager of the JO Hambro Capital Management UK Growth fund, has upped his financials weighting to nearly one-quarter of the £350m portfolio.
Having observed a “dramatic improvement” in the fundamentals of the sector, Costar has increased the fund’s exposure to financials since September last year. Since that time he has moved the fund from being 12% underweight in financials to 4% overweight.
Yet Costar says the bulk of the increase was made over the past three months. Costar, who has managed the fund since its launch in October 2001, says this is the highest exposure to financials the fund has had for many years.
“The sector saw a huge reduction of competitiveness as many [financial companies] went bust in the recession or were taken over,” he says. The shadow banking sector, comprised of non-mainstream institutions competing with banks, has also been cleared out.
This means a significant improvement in margins for those who survived. Quantitative easing and low interest rates in a more regulated environment are also making an impact.
Deleveraging is taking place in an orderly fashion and not causing huge distress, as feared by many, he says.
Costar says credit markets are opening up and provisions have peaked. “We will see lower returns on equity but at the same time less competition and more discipline in the market place. Therefore, the quality of earnings will improve,” he says.
Over the past three months, Costar has added companies including Lloyds TSB, Intermediate Capital and Man. He says that Lloyds TSB, which ranks among the top 10 holdings at 3% of the portfolio’s assets, will emerge with renewed strength in Britain.
Intermediate Capital is, with 2.5%, the biggest active overweight of the portfolio. “It is growing and competition is decreasing,” Costar says.
He expects Man, which accounts for just over 2% of the portfolio, to benefit from a clear out of the hedge fund industry.
However, Costar says the overweight in financials was mainly the result of “individual and very selective” stock selection decisions. When evaluating holdings, he screens for structural growth potential and strong franchises.