The UK financials sector is coming back into favour as the main market continues a rally that began...
The UK financials sector is coming back into favour as the main market continues a rally that began in the middle of March.
David McCraw, manager of the Edinburgh Financial Fund, says the sector is seen as a geared play on the direction of markets. Investment banks, stockbrokers, asset managers and life assurance companies, all of which suffered during the downturn, have seen a bounce in performance over the last three months.
Indeed, over the year to 9 June 2003, the Speciality and Other Finance sector has returned 19.47%, compared to growth of just 6.38% in the FTSE All-Share. As a result Mike Felton, UK fund manager at Isis Asset Management, has increased his exposure to the more growth-oriented and stock market-influenced high beta financial stocks and decreased his exposure to more traditional defensive financial companies.
He says that since 12 March he has been switching out of mortgage banks and putting money into stocks like 3i, a stock he regards as a useful proxy for the recovery in small technology-based companies.
Felton has also been increasing his exposure to some of the more distressed banks such as Lloyds TSB, as concerns over the financial stability of life companies have diminished after the market rally and reduced concerns of a dividend cut.
Within the life assurance sector, Felton says he has put some new money into Aviva, as the high beta nature of the sector makes it suitable for gaining exposure to a bounce in the market. Richard Buxton, manager of the Schroder UK Alpha Plus fund, has been invested in financials for several months. He has a big weighting in both domestic and Asian banks, which performed well over the bear market in relative terms and were strong at the start of the market rally. However they have been dull in the last few weeks due to the rally in high beta stocks.
However Buxton believes this is a temporary phenomenon and a reflection of the strength of the banks during the bear market.
He says: 'The banks have been hugely de-rated so I think there is scope for a large degree of bounce-back going forward. As such, I have 26% of the UK Alpha Plus fund in financials.'
Another area of financials which has seen a slowdown in performance in recent weeks is life assurance companies, which Buxton says is unusual as these are highly geared to financial markets.
However he believes the poor performance won't last long because short-term issues facing the sector, including capital adequacy shortfalls and the selling of equities at an inopportune time, will quickly be forgotten.
He says: 'It is unusual to have a sustained bull market phase without financials doing particularly well. They have only underperformed in the last four to six weeks because they were the first move upwards post 12 March. Only in the last few weeks has the baton been handed over to the high beta stocks like media and cyclical engineers.'
As such Buxton is not expecting to alter his sector weightings in financials as he believes banks and life assurance companies are due for further gains in the coming weeks.
Finance sector has outperformed.
Rally in high-beta stocks.
Banks and life firms due for bounce.
Financial sector very volatile.
Financial will be hit if rally peters out.
Still short-term issues within life companies.
Annuity market worth £4bn in 2017
For ‘distress’ caused
Oversees £30bn of advised and D2C assets
Less than a third of top paid employees are women
£1bn business since inception