Foreword
By Annabel Brodie-Smith
This month we’re embracing the spirit of the FIFA World Cup with a global tour of the opportunities provided by investment companies. Personally, I have no interest in football, having grown up in rugby-loving Wales, but global investment – now you’re talking…
Alliance Trust plays ‘fantasy fund manager’ as Craig Baker from Willis Towers Watson explains their role as team manager in choosing the eight world class stock pickers who make up Alliance’s team of managers. He explains: “Our role as team manager of the stock pickers is then to keep a watchful eye from the touchline to ensure they play well together and don’t have too many overlapping positions…”
Ian Cowie explains how “investment companies bring a world of opportunity within the reach of the individual investor.” He delves into how his portfolio has performed looking at Baillie Gifford Shin Nippon investing in Japanese smaller companies, JPMorgan Indian, Fidelity China Special Situations, and BlackRock Latin American amongst many others.
Carrying on with the emerging markets theme, 150 years ago the first investment companies invested in the emerging market of the day, the US. So we asked Terry Smith, manager of Fundsmith Emerging Equities Trust (more commonly known at FEET) and other managers to tell us the emerging markets which could achieve similar growth to the US in the future.
Moving on to the world’s biggest health challenges, we look at the investment companies and VCTs which are investing in companies that are aiming to provide treatments to help people live longer. This innovative area includes treatments and diagnostics for cancer, Alzheimer’s, antibiotic-resistant “superbugs” and diabetes.
"Global investment – now you’re talking"
Annabel Brodie-Smith, AIC
Finally, we examine the global financial sector with Nick Brind, Co-Manager of Polar Capital Global Financials Trust. He believes financials have been overlooked for good reason but there is an opportunity there. As Willie Sutton, a US bank robber, allegedly replied when asked why he robbed banks “Because that’s where the money is.”
Hope the football fans enjoy the World Cup. I will be trying hard to avoid it!
Annabel Brodie-Smith
Communications Director, AIC
Alliance Trust
Craig Baker, Willis Towers Watson, explains his role as team manager choosing eight world-class stock pickers
Craig Baker, Global Chief Investment Officer of Willis Towers Watson, managers of Alliance Trust
Let’s play fantasy fund manager. If you were asked to pick a World Cup winning global equity team, who would you select? You know you can’t rely on a single star player to win the game; you need experts in all key positions who play together as a cohesive unit. The manager’s role is key in achieving this.
The Alliance Trust multi-manager portfolio consists of eight world class stock pickers, each chosen by Willis Tower Watson (WTW) using a combination of quantitative and qualitative research. Some are familiar domestic signings, such as Ben Whitmore at Jupiter, while others are overseas talent. Indeed, managers such as Bill Kanko of Black Creek Investment Management in Canada focus on institutional clients and are only accessible to retail customers in the UK through the investment company.
Drawn from a pool of 40 global top performers judged by WTW to be top rated for the asset class, they each have different but complementary styles. Once picked, the instructions from us are simple: build bespoke portfolios of your best 10-20 ideas globally, leaving out the fillers or benchmark huggers that might be included in more diversified portfolios. We don’t want the stock pickers’ best ideas portfolios to carry any passengers that might dilute returns.
Our role as team manager of the stock pickers is then to keep a watchful eye out from the touchline to ensure they play well together and don’t have too many overlapping positions, though in practice this rarely occurs because each manager tends to stick to their particular style discipline.
Quality growth managers, such as George Fraise, Gordon Marchand and Rob Rohn, of Sustainable Growth Advisers in Stamford, USA, and deep value managers, such as Hugh Sergeant at River and Mercantile, rarely invest in the same stocks.
"Our role as team manager of the stock pickers is then to keep a watchful eye out from the touchline to ensure they play well together"
Craig Baker, Alliance Trust
"Confident investors can always pick their own managers, but they won’t necessarily have the same access or rigorous selection process that we do and they will also probably pay a much higher price to assemble the team"
Craig Baker, Alliance Trust
When the stock pickers’ selections are blended together, they look similar to the benchmark in terms of country and sector allocations. Thus, the portfolio offers broad exposure to the shape of the global economy. But with an active share of 80%, at the stock level the portfolio is nothing like the index. We call it a diversified, high conviction portfolio.
This sounds like a contradiction in terms but is, in our view, the optimal multi-manager structure. One highly skilled stock picker can produce impressive bursts of performance but they’re sometimes followed by a slump. If active managers stick to their convictions, performance more often than not improves again and, over time, the end result can be meaningful outperformance versus the benchmark.
But the ups and downs along the way can be somewhat nerve wracking. We believe the design of the Alliance Trust best ideas portfolio can deliver both higher alpha than a traditional multi-manager offering, comprising a series of diversified off the peg portfolios, and lower volatility than one high conviction stock picker playing on their own. Of course, confident investors can always pick their own managers, but they won’t necessarily have the same access or rigorous selection process that we do and they will also probably pay a much higher price to assemble the team.
The breadth and depth of our relationships with a wide range of managers globally gives us significant buying power that has enabled us to negotiate a very attractive deal for retail investors used to being charged much more than 0.65% for a high quality multi manager portfolio. It also means that we have a deep bench of substitutes to slot into the team if one of the stock pickers gets injured or loses form.
"There are still many attractive stock specific situations for skilled bottom up stock pickers to exploit"
Craig Baker, Alliance Trust
The portfolio has only been in play for just over a year so it’s still early days, but performance so far has been encouraging, beating the MSCI All Country World Index by more than the target of 2% after costs in the first 12 months.
Nine years into the second longest bull market in history and with global equity valuations looking stretched, we expect returns to moderate from here and volatility to increase as the ultra loose monetary policy adopted in the wake of the financial crisis is unwound. But even if opportunities are limited at the aggregate level, there are still many attractive stock specific situations for skilled bottom up stock pickers to exploit.
Indeed, stock pickers such as Andy Headley at Veritas and Bill Kanko at Black Creek have been taking advantage of recent dips in valuations to increase exposure to high quality companies like Safran, the aircraft engine manufacturer, and Hain Celestial, an American-based, leading organic and natural food, beverage and personal care products company.
The portfolio contains many such opportunities for investors seeking consistent capital growth. As one of only four investment companies that have increased their dividend every year for 50 years or more, Alliance Trust also provides investors with a reliable source of income.
Net net, we think that’s a compelling result and should keep our all-star team challenging for the title season after season.
A world of opportunity
Ian Cowie explains the benefits of investment companies for global exposure
Ian Cowie
In much the same way that the FIFA World Cup focusses the attention of football fans around the globe, investment companies bring a world of opportunity within reach of the individual investor.
Some of the fastest-growing economies on the planet are geographically distant from Britain but pooled funds have provided a tried-and-tested way of obtaining professionally-managed international asset allocation for 150 years. Indeed, one of the stated objectives of the very first investment company was to enable individual investors of all sizes - not just the rich - to gain exposure to higher rates of income and growth that may be achieved overseas.
Never mind the past, though, what about the present and the future? Ongoing uncertainty about Brexit demonstrates that political risk does not start at Dover and that international diversification is one way to diminish the uncertainty inherent in any one stock market or economy.
Investment companies provide a convenient and cost-effective route into overseas markets that may trade while we are asleep, dealing with local laws and taxes, while sharing the expense of professional stock selection in economic sectors of which we may know next to nothing.
For example, I must confess I am largely ignorant about Japanese smaller companies but one of my most successful investments in recent years has been a specialist investment company in this sector: Baillie Gifford Shin Nippon.
"I am largely ignorant about Japanese smaller companies but one of my most successful investments in recent years has been a specialist investment company in this sector: Baillie Gifford Shin Nippon"
Ian Cowie
Similarly, the longest-held share in my portfolio - JPMorgan Indian - has risen in price more than ten-fold during the 22 years in which I have invested in the sub-continent, via an investment company that was originally called Fleming Indian1. Again, I know very little about Indian companies but am happy to pay professional fund managers to sort the wheat from the chaff in a fast-growing economy with low costs and high returns on investment.
More recently, and with similar motivation, I have bought shares in Fidelity China Special Situations. However, it’s only fair to add that investors seeking higher rewards overseas must beware of higher risks - in much the same way that would be the case closer to home. For example, my shares in BlackRock Latin American continue to languish at a lower price than I paid. No wonder City cynics sometimes say Brazil is the country of tomorrow - and always will be.
Of course, emerging markets are not the only reason to invest internationally. Polar Capital Technology and Worldwide Healthcare investment companies are both in my top 10 holdings by value, having delivered substantial capital gains from their eponymous sectors, which are both dominated by companies based overseas - particularly America. I also obtain
specialist exposure to the world’s biggest economy via JPMorgan US Smaller Companies.
But it’s not all about capital growth. Income-seekers should consider international diversification to diminish their reliance on a relatively small number of sterling-denominated high-yielders on the London market and gain access to a larger choice of dividend sources overseas.
For example, long-term holdings in my portfolio include European Assets Trust (EAT), Henderson Far East Income and Schroder Oriental Income. All three deliver inflation-beating income streams substantially above the average yield on the FTSE 100 of Britain’s biggest shares. Better still, I hold EAT in an ISA so its income can be received without any further tax liability.
Whether your priority is income or growth or a mixture of both, investment companies bring a world of opportunities within reach. Are you making the most of them?
Ian Cowie is a columnist at The Sunday Times
1. I still have The Fleming Investment Trusts Share Plan statement from April 1996, showing I invested £2,985 in what was then Fleming Indian at 63p per share. JPMorgan Indian closed at 704p yesterday (June 14, 2018).
Emerging markets
Which are the ones to watch?
The first investment company launched back in 1868 enabled private investors to benefit from investing in a diversified portfolio of investments to spread risk. The first investment companies invested in the emerging markets of their day, notably the United States.
Whilst the US has grown to become the world’s largest economy, investment companies still seek exciting opportunities in new markets all around the world. Over 25 years to the end of May 2018, the Global Emerging Markets sector has returned 834%.
The AIC has collated comments from investment company managers in the Global Emerging Markets sector on which emerging markets are the ones to watch and could achieve similar growth to that of the US in the future.
Annabel Brodie-Smith, Communications Director of the AIC said: “A lot can happen in 150 years - looking back, in 1868 the US was the emerging market to invest in and it’s now the world’s largest economy. Today’s emerging markets continue to offer interesting opportunities to investors and investing through the closed-ended structure can help investors access what can sometimes be an illiquid asset class.
“Although we don’t have a crystal ball to see into the future and tell us which countries will achieve significant growth, it’s very interesting to hear which countries emerging market managers think are the ones to watch.”
Global Emerging Markets sector % share price total return to 31 May 2018. Source: Morningstar.
Manager comments
Terry Smith, manager of Fundsmith Emerging Equities Trust said: “Asked to name an emerging market which might emulate the experience of the United States, I would choose India. Why? India is a democracy. In fact, it is the world’s largest democracy - the United States is second in size of electorate. Whilst it is certainly possible to create a lot of value in a dictatorship or one-party state, peaceful transitions to democracy are rare and so any regime change in those countries may be disruptive and in the interim there is no rule of law enforced by an independent judiciary. This is important - there is no point in identifying a successful national growth story only to find that some or all of the value of your investment is stolen from you.
“India has rule of law and an independent judiciary and, in fact, ranks very highly in most surveys of protections for minority investors. But this also illustrates another point. Whilst I am naming a country, you don’t invest in a country. You invest in the shares of companies and India is a repository of some of the highest quality consumer businesses in emerging markets in my view.”
Chetan Sehgal, manager of Templeton Emerging Markets Investment Trust (TEMIT) said: “We believe that China and India are two economies that could experience a similar trajectory. Up until the 19th century, China and India were the two largest economies in the world in terms of GDP. The US, however,
overtook them by the turn of the century. Fast-forward to today, China is the world’s second biggest economy after the US, and is about five times larger than India, which is expected to overtake the UK to become the world’s fifth largest economy this year.
“The International Monetary Fund forecasts China and India to grow by 6.6% and 7.4% respectively in 2018, ranking them among the fastest-growing major economies in the world. This trend is expected to continue for the foreseeable future. The UK, in comparison, is expected to grow by 1.6%. Together, India and China account for over a third of the global population, which brings with it huge potential, both in terms of consumers and labour. The rapid adaptation of information technology in emerging markets such as India and China has further propelled their strong growth trends.”
Ross Teverson, co-manager of Jupiter Emerging & Frontier Income Trust said: “China is the obvious example of an emerging market country making rapid and dramatic economic progress; today, a number of Chinese
"China is the world’s second biggest economy after the US, and is about five times larger than India"
Chetan Sehgal, Templeton Emerging Markets Investment Trust
companies rank amongst the largest and most innovative globally. However, there are many other countries within emerging markets that also have the potential to experience significant structural change in coming years.
“For example, within sub-Saharan Africa, we see a number of attractive long-term investment opportunities resulting from rising financial inclusion, as well as improved infrastructure, communications and technology. Gradually increasing penetration of financial products, combined with remarkable demographics – the median age in Kenya is just 20 years – should create a backdrop that, for well-placed financial institutions operating in the region, should prove conducive to strong and sustained earnings growth for a long time to come.”
Frontier markets
Commenting on the frontier markets that have further potential, Chetan Sehgal, manager of Templeton Emerging Markets Investment Trust (TEMIT) said: “In the frontier-market universe, Vietnam is one of the most populous countries, with approximately 100 million, and it is also one of the fastest-growing economies, with GDP growth in 2018 estimated at 6.6%.
"In the frontier-market universe, Vietnam is one of the most populous countries, with approximately 100 million, and it is also one of the fastest-growing economies"
Chetan Sehgal, Templeton Emerging Markets Investment Trust
“The high growth potential in Vietnam is driven by a combination of factors, including favorable demographics and urbanisation dynamics creating a large domestic consumer market, low penetration of goods and services, and the opportunity for technological leap-frogging, allowing growth in economic infrastructure and efficiency gains.”
The world's biggest health challenges
Investment companies investing in treatments for cancer, Alzheimer’s and antibiotic-resistant ‘superbugs’
Investment companies have been offering investors access to innovative businesses and sectors for 150 years and an area where innovation is particularly prominent today is healthcare and biotechnology.
It’s well known that investment companies in Sector Specialist: Biotechnology & Healthcare invest in pioneering life science and medical treatments and over five, 10 and 20 years to 31 May 2018, the sector has returned 116%, 532% and 1,107% respectively.
However, it is perhaps less well known that other investment companies and VCTs are also investing in businesses which are addressing major challenges to human health, such as cancer, Alzheimer’s, antibiotic-resistant ‘superbugs’ and diabetes.
The AIC has collated comments from managers of investment companies and VCTs which are investing in pioneering medical treatments. There are manager comments from International Biotechnology Trust, Polar Capital Global Healthcare, Scottish Mortgage, Jupiter
"Over five, 10 and 20 years to 31 May 2018, the sector has returned 116%, 532% and 1,107% respectively"
AIC
European Opportunities and the Downing and Albion VCTs.
Annabel Brodie-Smith, Communications Director of the Association of Investment Companies said: “As the oldest form of collective investment, investment companies have been investing in new opportunities for 150 years. Today, this pioneering spirit continues with investment companies offering investors exposure to ground-breaking treatments in biotechnology and healthcare. Investment companies are investing in businesses which are attempting to solve some of the biggest health challenges of our time and most importantly, help people live longer. And it’s interesting that as well as specialist biotechnology and healthcare investment companies, investment companies and VCTs in other sectors are investing in these transformative treatments and technologies.”
Manager comments
Sector Specialist: Biotechnology & Healthcare
Carl Harald Janson, Lead Investment Manager of International Biotechnology Trust plc said: “According to the World Health Organisation, cancer is the second largest cause of death. That is why International Biotechnology Trust has invested in companies which treat this disease since its inception. In
recent years, we have increased our allocation to this area of unmet medical need. On 31 March 2018, 42% of our portfolio was invested in companies focussed on oncology. Our increased interest reflects the advancement in the treatment of cancer over the last two decades. Scientists have significantly improved their understanding of this disease, which has led to a meteoric increase in both the number of ways to treat the disease and new drugs.
“The treatment of lung cancer is testament to the headway made by scientists. In 1996, there were only four approved chemotherapy drugs approved for this disease. By 2016, 19 drugs had been approved covering five different therapeutic categories. Now trials using drug combinations show increased treatment efficacy, which also increases the options available to patients. Our understanding of the complexity of treating cancer along with our knowledge of the latest scientific breakthroughs is a part of the specialist skillset which has enabled us to outperform the FTSE-All Share by 99.4% in the five years to 31 May 2018.”
Dan Mahony, Fund Manager of Polar Capital Global Healthcare said: “The UK is a global leader in life sciences research but historically we have been less successful at scaling-up these companies to become global players in the $7 trillion healthcare market. The key advantage of a closed-ended investment company is that the investment manager can take a long-term view and back management teams with global aspirations and ambitions.
"Medaphor has developed state-of-the-art simulation technology for training medical professionals in the use of ultrasound. The company is close to commercialising a fetal scanning technology that uses artificial intelligence to augment the capabilities of medical professionals"
Dan Mahony, Polar Capital Global Healthcare
“A great example of this is our investment in Medaphor plc, which is one of the smaller companies in the portfolio. Medaphor has developed state-of-the-art simulation technology for training medical professionals in the use of ultrasound. The company is close to commercialising a fetal scanning technology that uses artificial intelligence to augment the capabilities of medical professionals to speed up workflows and improve the quality of ultrasound screening. This is a great example of UK science and technology helping to improve the quality and efficiency of healthcare systems around the world. The closed-ended structure allows us to allocate capital to companies such as Medaphor with ground-breaking technology that should not only provide our shareholders with good investment returns but also have a positive impact on society.”
Global and Europe Sectors
James Anderson, Joint Manager of Scottish Mortgage said: “We believe, indeed insist, that Scottish Mortgage’s most important role is to provide patient, supportive capital to help address the most serious problems in the world. That we can do this at scale is a privilege and an important asset. Plainly healthcare investing ought to fit this objective perfectly. But all too often we see established healthcare companies failing to address unmet clinical needs and instead avoiding the greatest challenges. So we’ve searched for innovative and ambitious companies that rarely feature in more conventional and less long-term portfolios.
“Our investment trust status and size allows us
"Grail is showing serious signs of being able to identify many of the most ravaging cancers at much earlier stages through its remarkable liquid biopsy innovations"
James Anderson, Scottish Mortgage
to offer almost permanent capital. Many of our investments are in unquoted companies that we are proud to offer access to in a manner and at costs not usually possible for private investors.
“We have investments in companies dealing with problems that at present seem intractable. Two such companies in the form of Denali (aiming at treating Alzheimer’s in time) and Unity (increasing healthy life spans) have just gone public. But perhaps our most crucial investments in recent years have been in the gene sequencing pioneer that is Illumina and its unquoted spin off Grail. We helped defend Illumina from an unwanted and unwarranted takeover by Roche so it could continue to focus on driving sequencing performance up and costs way down.
“Meanwhile Grail is showing serious signs of being able to identify many of the most ravaging cancers at much earlier stages through its remarkable liquid biopsy innovations. Their approaches are both causing particular excitement in China as it seeks to confront modern healthcare requirements for the first time. We’re excited by the prospects.”
Alexander Darwall, Fund Manager of Jupiter European Opportunities which invests in BioMerieux said: “BioMerieux is a well-established diagnostics company. It is at the forefront of developing syndromic diagnostics which allow multiple tests to be done and their results to be reported speedily. Concerns about antibiotic resistance underpin the growing importance of diagnostics and as a technology innovator BioMerieux is well placed to continue its long record of success.”
VCTs
Kostas Manolis, Partner of Downing, the manager of the Downing VCTs said: “Downing Four VCT Healthcare Shares invested in Destiny Pharma, a company that develops innovative medicines to prevent and treat infections from antibiotic-resistant bacteria or ‘superbugs’. New superbugs are emerging and spreading, making it difficult to treat common infectious diseases and increasing the risk of infection during procedures such as organ transplants, chemotherapy and major surgery.
“Destiny Pharma’s portfolio includes the drug XF-73, which rapidly kills bacteria before it can develop resistance. XF-73 is capable of killing 99.99% of Staphylococcus aureus bacteria within five minutes, including superbugs such as MRSA, and has a low potential for developing bacterial resistance.
“We are delighted to back the talented team at Destiny Pharma, which has built a strong patent portfolio of drugs targeting a real problem in hospitals around the world. We were attracted to the business because it is targeting a significant market opportunity with the potential for a faster route to market and improved patent protection. Since investment the company has floated on AIM and was awarded a grant from the US government for trials.”
Dr Christoph Ruedig, Partner and Healthcare Investment Specialist at Albion Capital, the manager of Albion VCT said: “Albion has been investing in healthcare services for almost 20 years and in digital health for the last 10 years. Over that time we have seen a slow but steady increase in the use of technology to deliver healthcare services. In particular, we’re seeing start-ups that are changing various care delivery models with the use of technology.
“An example of that is our portfolio company Oviva, a digital health company tackling diabetes and obesity. It delivers weight loss and dietetic counselling services and uses technology to make the service more effective and efficient. Its platform has been proven to deliver superior outcomes in over 40,000 patients in several European countries. Another example is our portfolio company Healios, an online platform that aims to provide 24/7 support for younger people suffering with mental health problems. They use technology to improve access and quality of care.”
Finding financials
Nick Brind of Polar Capital Global Financials Trust explains why it's time to re-discover the financial sector
Nick Brind, Co-Manager, Polar Capital Global Financials Trust
An easy mistake to make after the global financial crisis has been to look at the financial sector through the lens of the failings of a very small number of large banks. Another is to extrapolate short-term macro trends too far into the future, deciding their long-term future looks just as toxic so it is probably best to ignore the sector entirely.
But, as one analyst at Wells Fargo put it recently, the banking sector has subsequently suffered the biggest non-credit headwind in history, the biggest deleveraging, the worst revenue growth, the biggest increase in liquidity requirements, the worst legacy assets and the biggest legal charges in 80+ years. And now it is over.
The financial sector is the largest sector globally, representing between 19.6% and 22.5% of global indices, depending whether you include real estate investment trusts, which some of the major index compilers, including S&P, removed from the sector nearly two years ago. It is not only about banks in all their different guises, from private banks to commercial banks and so-called universal banks, which represent the largest part of the sector. It is also about insurance companies, life assurance companies, insurance brokers, stock exchanges, asset managers and wealth managers, to the more esoteric gold lenders and so on.
Reacting to the recovery opportunity
"The financial sector is the largest sector globally, representing between 19.6% and 22.5% of global indices"
Nick Brind, Polar Capital Global Financials Trust
When the Polar Capital Global Financials Trust (PCFT) was launched in July 2013 to provide a lower-risk way for investors to gain exposure to the financials sector, the sector at the time was uninvestable for many, albeit for good reason. A demonstration of how misplaced the perception of the sector has been is the fact that the financials sector has delivered 66.6%1 since launch* and the Trust 71.6%2. Including what UK banks have paid out in PPI redress in recent years, banks have in total paid out over $450 billion in fines since 2008, and post-financial crisis regulation has lifted capital requirement and compliance costs much further than anyone envisaged, the latter by six-fold for many institutions in US.
In 2016, the impact of low and negative interest rates raised the prospects of the profitability of the sector being crushed. But for the most part, the financial sector does well when the economies and financial markets in which they operate are performing well.
Furthermore, in contrast to previous economic cycles it is also a beneficiary of rising interest rates.
As interest rates have remained low since the financial crisis the margins of banks have come under pressure. In the latter half of 2016 we started to see the reverse happen as US interest rates were increased which has led to stronger earnings expectations and improving share prices.
The borrower/lender bank margin game
This is one of the key attractions of the sector over the medium term. Assuming interest rates and consequently bond yields continue to trend gradually higher, then the sector will benefit as banks increase the interest rate at which they charge individuals and corporates for mortgages and loans, while being slower to raise what they pay to savers and other depositors, thereby increasing profits. In particular, if the eurozone economy continues to improve and in due course the European Central Bank raises interest rates then their banks will be significant beneficiaries as will those in Japan as both are very interest-rate sensitive.
In Asia and emerging markets longer-term structural drivers from much lower levels of consumer debt and higher savings ratios offer significant long-term growth as financial services remain under-penetrated in many of these countries. The impact of technology, while a threat to the industry, is also an opportunity for those companies that embrace it.
For example, as customers of banks increasingly access their bank accounts online or via their smartphone so the need for fewer and smaller bank premises has led to branch networks shrinking. In the US Bank of America, JP Morgan and Wells Fargo each spend around $10 billion per year on technology and have consequently been taking market share from smaller US banks.
Expect a rise in M&A
In the UK we are used to a very small number of large firms that dominate banking, a trend also seen in Canada, Australia and many other European countries where there was significant consolidation post-financial crisis. As a result, the only consolidation of note in the UK in recent years has focused on the smaller banks with TSB acquired by Banco Sabadell, Aldermore Group acquired by First Rand and CYBG (owner of Clydesdale and Yorkshire Banks) approaching Virgin Money.
Conversely, in the US there remain over 5,000 banks, only one of which - Wells Fargo - can be argued as having a national presence. Regulators have until now been reticent about allowing further consolidation especially for those banks deemed “too large to fail” but now regulations have been tweaked we expect to see significant M&A activity over the next couple of years. Unless loan growth picks up sharply then the pressure will be on for regional banks to acquire or merge so they can compete more effectively with their larger peers where they are being outspent on technology.
What are the risks? A global recession or much weaker inflation would be a significant headwind for most financials. Nevertheless, while the sector would suffer along with underlying equity markets, it is a very different proposition today than it was 10+ years ago. Significant risk has shifted from banks’ balance sheets into capital markets making them less sensitive to economic shocks. In the US we would need to go back to the 1930s to find a time when banks had more capital set aside to insure against shocks.
"Opportunity is missed by most people because it is dressed in overalls and looks like work" - Thomas A. Edison
Counter-intuitively perhaps, a duller, more boring banking sector is what makes the financial sector so much more attractive and interesting. Its size means that there are plenty of attractive investment opportunities though while it is not only about banking, the performance of banks will be the biggest contributor of returns.
It is a sector that has been easy to overlook for good reason but to quote Willie Sutton, a US bank robber, who allegedly replied when asked why he robbed banks: 'Because that’s where the money is'.
Disclaimer:
* Total return from launch date on 1 July 2013 to 30 April 2018.
1.Financials Sector: MSCI World Financials + Real Estate Index. 1 July 2013 to 30 November 2017. Total Return in GBP terms.
2. PCFT NAV Total Return. Since launch: 1 July 2013 to 30 April 2018. Total Return in GBP terms. Source: Polar Capital, April 2018.
