JP Morgan is set to launch a fund which will invest in financial stocks worldwide. The portfolio wil...
JP Morgan is set to launch a fund which will invest in financial stocks worldwide. The portfolio will follow the analyst-driven style of the company's other sector funds, Teletech and Pharmatech.
The JP Morgan Global Financials Equity fund will be Luxembourg domiciled. The minimum investment is $50,000. Stock selection will be based on JP Morgan's established process. Portfolio manager Alistair Sayer said: "The process starts with each analyst calculating a long-term expected return for each of the stocks they cover. The local inflation rate is then stripped out and the stocks are ranked globally by their long term return. Analysts then make recommendations with a ranking that indicates their level of confidence in a stock. Based on this, our global team of analysts along with the portfolio managers identify a combination of long term value with a short term catalyst, reflected in a high rating. The managers then put the portfolio together with regard to overall risk controls.
A number of key long term drivers make this sector attractive for investors, Sayer believes. "There is increasing consolidation across the sector. M&A activity has tripled since 1996, and of particular note has been the large increase in cross-border mergers - foreign buying of US companies has increased five-fold over the same period," he said.
This trend of consolidation will also benefit the investment banking arms of banks which will be able to pick up increased fee business as a result, Sayer believes.
Another general trend from which financials are particularly well placed to benefit is the increasing importance of technology and the internet. "Technology will enable financial companies to drive down their costs. For example, if a customer walks into a bank and performs an operation, it costs the bank $1, and another $1 to confirm it by post. However, if that transaction is performed over the internet and confirmed electronically it costs only ten cents. Some of the more aggressive banks now want between 20% and 30% of their clientele transacting over a cheaper interface.
Consumers are increasingly embracing personal finance services over the internet. Sayer said: "AOL reports that in terms of millions of usage minutes personal finance was the most popular category in June 2000, ahead of news and sport." Nevertheless successful banks will need to have a broader strategy with some physical presence and an established brand name.
Other long term trends set to boost the sector include the increase in retirement savings, as evidenced by the strong inflows into US mutual funds, and the growth of the high net worth sector. "This area, of individuals with liquid assets of around $1m or more, is estimated at $23 trillion, and servicing it is a high return on equity business."
At a time when the teletech theme is undergoing a correction, with Nasdaq down by 25% so far this year, the financial sector bears a low correlation to this area of the market, and yet offers good growth opportunities to investors, Sayer believes.
"The inflation outlook also remains reasonably benign over the next 12 to 18 months, and financials tend to perform well in a stable or or falling interest rate environment. We could see US interest rates falling early next year, and European growth appears to be peaking. The UK could also see some rate cuts and in Japan we see no reason for rate rises from here. There are some risks in the near term: there is some concern about the credit cycle in the US, but we believe this is already more than reflected in some of the stock prices of US regional banks. Current credit spreads already discount a hard landing."
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