Framlington's peirson believes financial companies are not facing bankruptcy in the traditional sense of the word
ichard Peirson, manager of the Framlington Financial fund, believes there is little risk of a major collapse of a quoted financial company, despite severe insolvency issues.
While insolvency problems among life companies are hitting the headlines, Peirson said these companies are not insolvent in the traditional banking sense.
'A traditional company goes bankrupt when its liabilities exceed its assets. All we are talking about here is the traditional, very significant cushion of surplus assets these companies have been expected to maintain by the regulators ' those cushions have been eroded. They still have very significant shareholders' funds and they're not within a mile of being declared bankrupt,' he added.
There are a lot of things companies can do before they get themselves into that state, according to the fund manager.
'They can stop writing new business, they can change their business mix, change the mix of the assets that make up their investment portfolio, cut their bonus rates and impose surrender penalties. All of these have happened and are happening. None are particularly positive in encouraging new investors to put money with these companies, but we are a long way away from a financial collapse of a major quoted company,' he said.
The Framlington Financial fund is underweight in the banking sector, but within that there is a bias toward retail and consumer related banks. Peirson is steering clear of commercial and investment banks.
Overall, the fund is overweight in insurance. Within this sector there is an emphasis on general insurance while underweight in life assurance. There is also a slight overweight position in property.
Peirson said there are three distinct themes to be found among the financials sector. First is the long-term growth theme, which is very much driven by the demographics and long-term savings trend.
Second is the more cyclical areas which move in and out of fashion, depending on economic conditions. Such examples include investment banks, brokers, and insurance companies.
The third area consists of smaller, faster growing businesses that are meeting a particular need.
'At the moment, some of the cyclical aspects are overtaking the long-term demographic strengths,' he said.
A good example of these cyclical trends is the problems affecting Royal & SunAlliance and other life companies.
Framlington Financial is 38% invested in the US, 26% in continental Europe, 26% in the UK, 6% in Japan, 1% in Asia and 3% in cash.
There are 100 holdings in the fund. The largest is Royal Bank of Scotland, which represents 4.7% of the portfolio. Peirson describes this as the most attractive of UK banks at present.
Until recently, there was a similar weighting in HSBC, which has since been sold after HSBC's pre-Christmas announcement of its acquisition of Household International, a large US sub-prime lender.
'I was concerned this would damage the credibility of what, historically was a very solid, safe and prudent company,' he said.
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