Which funds offer Lloyds exposure ahead of next year’s retail sale?

The banking sector has saw a boost following the government’s announcement that it will offer at least £2bn of Lloyds Banking Group stock to the public at a knockdown price next spring, but which funds offer exposure to the stock ahead of the sale?

Traders have cheered the news of the sale with shares in the taxpayer-backed bank up by 3 per cent over the past week.

Lloyds, which received a £20.5bn bailout at the height of the financial crisis, giving the government at the time a 43 per stake, has started to pay a dividend again and is anticipated to yield 3.5 per cent this year and 5 per cent in 2016.

The terms presented by the government for next year’s sale includes a discount and bonus shares, but investors who want to access the stock and banking market now should look at the Investec Special Situations, Schroder UK Alpha Income and Artemis Income funds, says AXA Wealth head of investing Adrian Lowcock

“The Lloyds share offer is an important step in returning the UK banking sector to full private ownership and an opportunity for investors to access the shares at a discount.

“However not everyone wants to buy individual shares and this is where funds can help. By investing in a manager who has done all the research and analysis investors are able to benefit from that expertise, access the UK banking sector and get a well-diversified portfolio.”

Investec Special Situations

Investec Special Situations, which has achieved a total return of 47 per cent over the past five years, has a 4.31 per cent allocation to Lloyds and a hefty 19.46 per cent in banks overall. 

Managed by veteran contrarian investor Alastair Mundy, he looks for companies whose share price has fallen substantially from their peak. Lowcock says: “Mundy is effectively a bargain hunter and buys companies, which are undervalued compared to his analysis. His approach means he invests in areas of the markets others avoid providing investors with diversification and the potential to outperform in rising markets.”

Schroder UK Alpha Income

Another of Lowcock’s picks is Schroder UK Alpha Income, which is up 73 per cent over five years and carries a yield of 4 per cent. Manager Matt Hudson holds 11 per cent in UK banks, with 3.82 per cent in Lloyds. “He follows the market cycle to identify which companies will do well in and make adjustments accordingly. In addition to economic analysis he researches companies looking for potential dividend increases or rises in earnings growth,” says Lowcock.

Artemis Income

Managed by Adrian Frost and Adrian Gosden, Artemis Income has 3.54 per cent in Lloyds and 9.34 per cent in the banking sector. Lowcock says: “They focus on businesses with sustainable cash flows and attractive valuations. The duo have exceptional stock picking skills with an emphasis on cash generation.” The fund has a historic yield of 4 per cent and has delivered a total return of 55 per cent over the past five years.