Jupiter fund manager Steve Davies has strengthened his UK banks allocation saying domestic banks are set to be the biggest recovery play in the market.
Davies, who manages the £1.7bn Jupiter UK Growth fund, says UK banks are set to become profitable again and distribute more to shareholders.
He says: “I see a sharp improvement in the underlying profitability of banks and expect these profits to come back to shareholders. Valuations are very low and I can still buy Barclays and RBS below book value. As the recovery of the UK economy comes through the amount of assets banks set aside for the bad loans is also falling dramatically.”
Davies adds that more automation in UK banks, including improvements around their digital offering, will help them cut costs further.
Lloyds Bank, in particular, which is Davies’ biggest bet in his fund, should distribute more to shareholders, he says.
Davies says: “It was a very boring stock 10 years ago and now it should sit well again in any income fund.”
Lloyds is 7.5 per cent of the fund, followed by Barclays at 7.1 per cent and RBS at 4 per cent, which the fund manager would consider increasing as the stock “becomes more liquid”.
However, Davies is not the only manager at Jupiter who has been watching UK banks more closely.
Alastair Gunn and Rhys Petheram, managers of the Jupiter Distribution fund, Jupiter High Income fund and the newly launched Enhanced Distribution fund, have also boosted their UK bank positions adding to Barclays and Lloyds and reducing their HSBC allocation.
Gunn said he bought RBS two months ago as a “tactical” and cheap position and is planning to hold the allocation until 2017 when the bank will start paying dividends.
Looking ahead to potential headwinds for the sector, Davies says bank stress tests are not likely to affect UK banks too much.
He says: “This year it is more about stress testing emerging market banks with Standard Chartered going to be in the firing line.”
Davies also says the vacant chief executive role at Barclays should not cause any concerns for shareholders.
Former Barclays’ chief executive Antony Jenkins was fired from the lender in July 2015 and the bank is currently looking for his successor.
Davies says: “There is nothing wrong with Barclays’ current strategy, it is just a question of getting on and executing it and they’re actually making big progresses even in the absence of a chief executive. I don’t think you need a radical outsider to come in and shake the whole thing up.”
He adds: “Barclays retail bank and Barclaycard are two phenomenally good businesses. If anything those two on their own are probably stronger businesses than Lloyds because they’ve got growth as well as good returns.”
Davies, who has reduced the cash holding of the fund from 10 per cent to 5 per cent, continues to look for other investment opportunities.
He says: “I have £80m of firepower at the moment, which is a nice position to be in, in these market conditions.”