Financial stocks may be buoyant later in 2008 once they recover from early setbacks, according to Guy de Blonay, manager of the New Star Global Financials Fund, which is AA rated by Standard & Poor's*. Guy, to whom Citywire has awarded its highest AAA-rating*, notes that following a rough second half of 2007 and first few weeks of 2008 the shares of certain financial companies now have a lot of bad news priced in - to the point at which he believes a revival may be around the corner.
It would have been hard to miss the financial crisis that hit western markets in the final months of 2007 - from the US sub-prime lending concerns through to the Northern Rock crisis. Equity markets in general were volatile with many investors struggling to avoid major casualties from the US sub-prime debacle especially banks and other financially related companies. It is worth remembering, however, that not all banks have the same exposure to the collateralised debt obligations that have contributed to the recent credit crunch. Financials is not a single homogenous sector. Not only are there a variety of companies that fall into the category but there is also geographic diversity.
Guy has utilised this dual diversity in recent months, helping his fund to outperform the wider global financials market. The New Star Global Financials Fund gained 8.70% in 2007 compared to a 9.22% fall in the MSCI World Financials Total Return Index**. Within the difficult environment Guy believes that the first half of 2008 may also be testing in terms of equity market volatility and the impact it may have on financial stocks. There is significant potential, however, and Guy believes 2008 may end up being a strong year for the sector across all geographies.
"Unsurprisingly, the sector has been among the worst performers in 2007, and I think we may be more than half way through the readjustment," he says, referring to the fall in share prices of some financial stocks. But in difficult markets there is an opportunity to buy, and in this case there is the selective opportunity to pick up some cheap and promising financial companies that have been unfairly sold off."
Highlighting this, Guy points out that when technology stocks were reaching new highs in late 1999 and early 2000, companies such as Cisco Systems, were trading on multiples close to 200 times their 12 months forecast earnings, with no dividend yield, so when the fall came, it was a long drop. Companies in the financials sector were already trading on comparatively low valuations ahead of the recent de-rating, making them even more attractive today as the current debacle and poor sentiment has pushed their prices down further. Banks are now trading at distressed valuations with a fair amount of bad news already out, he says. For example, Royal Bank of Scotland, he points out, is trading on some six times 2008 earnings estimates and offers a 2008 estimated dividend yield of 8.2%, with the prospect of double digit dividend growth in the coming years.
In light of a potentially difficult environment and while waiting for sentiment to favour this sector once again, there are still opportunities to be had in the financials sector. Guy says that while he is constantly seeking out attractive pricing opportunities, he is also running his fund with an eye to avoiding disasters. Consequently, he is avoiding mortgage banks as well as regional banks in the US, UK, Spain and Ireland. While the first two may seem justified in light of recent news, he notes that both house prices and borrowing have been high in Spain and Ireland.
That does not mean that all banks should be avoided; not all of them are exposed significantly to the areas of concern. One of the top holdings in the New Star Global Financials Fund is Standard Chartered, an international banking group operating principally in Asia, Africa, Latin America and the Middle East; Guy continues to like emerging market growth and with emerging market credit volumes and quality remaining good, the case for exposure to secular growth is a strong one.
Guy believes that the big area of growth in financials over the next five to 10 years will be Asia, so he is looking to have some exposure to this area - including via banks. Insurance companies such as Prudential also offer good exposure to Asian growth, he says.
Equally, there are other areas of the financials sector that look interesting at the moment. "I am not only trying to channel money into companies that are less sensitive to the sub-prime crisis, but also into some companies that may benefit from the volatility," he says. Even in difficult times there are those companies that can make money out of falling share prices and Guy is searching for them. Hedge funds are one such opportunity. They exist on the idea that they can make money when stocks go down, so Guy is looking to hedge fund firms and Man Group is an attractive candidate. Another way he is exploiting this potential is through stock exchanges or inter-dealer brokers such as Icap. "Volatility and uncertainty in stock markets mean people are buying and selling more actively and looking for protection driving volumes higher," he says.
Overall though, with banks' share prices at very depressed levels, in some cases at 20-year lows, Guy believes financials as a sector will enjoy a recovery, possibly by the second quarter of the year. Now, he says, it is just a question of sentiment.
*At 31 December 2007
** Data source: Lipper, sterling, NAV to NAV, net income reinvested.
Past performance is not necessarily a guide to future performance. The opinions expressed here represent the views of the fund manager at 17 January 2008 and should not be interpreted as investment advice.
Important information
Past performance is not necessarily a guide to future performance. The value of investments and any income from them may fall as well as rise and investors may not get back the amount originally invested. The value of investments may also increase or decrease as a result of changes in exchange rates between currencies. The opinions expressed here are solely those of the fund manager at the time of print and should not be interpreted as investment advice.
The New Star Global Financials Fund (formerly the WorldInvest Management Fund) (the "Fund") opened to retail investment on 19 May 2003. Performance history for the Fund includes that of the WorldInvest Management Fund which was launched on 28 December 2001.The Fund invests in a specialist sector, which may be less liquid and produce more volatile performance than an investment in a spread of investment sectors.
This document is for professional investors, professional advisers and other financial institutions only and should not be provided to or relied upon by private investors. This document should not be distributed to any third parties. The Fund should be viewed as an investment suitable only for investors who can fully evaluate and bear the risks involved. This document does not constitute an offer or solicitation to anyone in any jurisdiction in which such an offer is not authorised or to any person to whom it is unlawful to make such offer or solicitation. Distribution of this document and the offering of shares in certain jurisdictions may be restricted and accordingly persons into whose possession this document comes are required to inform themselves about and to observe such restrictions. If this is the case, this Fund cannot be the subject of active marketing in your jurisdiction.
The Fund is registered for sale in the UK, France, Spain and Italy and is recognised in Singapore.
Full details of the Fund can be found in the prospectus. Any decisions should be made solely on the basis of the relevant documents, which are available on request from New Star. The Simplified Prospectus is also available upon request.
The shares referred to in this document have not been and will not be registered under any United States securities laws, and except in a transaction that does not violate the United States securities laws, may not be directly or indirectly offered or sold in the United States of America, or any of its territories or possessions or areas subject to its jurisdiction, or to or for the benefit of a United States person.
New Star Investment Funds Limited is the ACD for the Fund, and the Investment Manager is New Star Asset Management Limited. Both firms are authorised and regulated in the UK by the Financial Services Authority.
New Star Investment Funds is the trading name of New Star Investment Funds Limited, part of the New Star Marketing Group. New Star Investment Funds is not authorised to give investment advice and only provides information on the New Star Group's products.
Issued by New Star Investment Funds Limited.