Should bond investors worry about defaults?
The number of voices predicting a recession are growing. The UK economy contracted in the first...
Since the global financial crisis began to gather momentum some 10 years ago, UK banks have struggled. While the FTSE All Share has recovered and returned almost 100%* for investors over the decade, the banking sector, which fell some 70% to the low in March 2009, has lagged behind and the sector remains 12.73%* lower than it was 10 years ago.
With the exception of a brave few who may have invested at the market bottom and enjoyed a brief but strong bounce, investors have generally not been rewarded by sticking with these unloved companies and would have done better if they had looked elsewhere.
However, over the past couple of years, the sector has started to see a bit of a turnaround. Over two years, it has outperformed the broader FTSE All Share index by just over 10%**. With the government rumoured to be looking to sell its stake in the Royal Bank of Scotland this week, is now the time to invest?
Three Elite Rated funds currently have Royal Bank of Scotland (RBS) in their top 10 largest holdings. Jupiter UK Special Situations is one, and also holds Standard Chartered. Investec UK Special Situations is another to favour RBS along with Barclays and HSBC. The third is Schroder Recovery, which has four banks amongst its top 10: RBS, Standard Chartered, HSBC and Barclays.
All three funds are run with a ‘value’ investment strategy. The managers are actively looking for companies that are unloved and cheap but which they believe have more potential than the wider market believes.
Juliet Schooling Latter, research director at FundCalibre, commented: “The banking sector does still look good value compared with other parts of the market, and, if interest rates go up, it will be a more favourable environment for them. However, with recent economic data having been downgraded, I am not convinced we will see rates rise soon (or significantly). I think US banks are perhaps more interesting, as they are already enjoying higher interest rates and there are more on the cards.”
T. Rowe Price Global Focused Growth Equity is an example of an Elite Rated fund that is seeing opportunities in US banks, with J. P. Morgan Chase & Co amongst its top 10. Fidelity Global Dividend is another. Dan Roberts, the manager, favours US Bancorp, the parent company of US Bank National Association (the seventh largest bank in the US). In contrast, he owns none of Bank of America Corporation, which is 0.7% of the MSCI AC World index. Brown Advisory US Flexible Equity is the third fund. The managers of this fund have three banks in the top 10: Charles Schwab Corporation, Wells Fargo & Company and JP Morgan Chase & Co.
While the number of listed UK banks is relatively small in number, in the fixed income asset class there is far more choice. Each bank will have multiple types of bond in issuance: in different currencies, with different maturity dates and in different parts of the capital structure.
The sector is very popular amongst Elite Rated bond funds and the allocation to the sector is far higher. For example, Invesco Perpetual Corporate Bond fund holds bonds from Barclays, Lloyds and Santander UK in its top 10. Rathbone Ethical Bond has 31% invested in the sector and holdings include Barlcays and HSBC. Away from the UK the manager also holds Dutch multinational bank Rabobank Nederland. Finally, TwentyFour Dynamic Bond fund has just shy of 24% held in bank bonds. Amongst its favourites are Nationwide Building Society and Coventry Building Society.
*Source: FE Analytics, total returns in sterling, 10 years to 29 May 2018 looking at the FTSE All Share and FTSE All Share Banks sectors.
**Source: FE Analytics, total returns in sterling, 2 years to 29 May 2018 looking at the FTSE All Share and FTSE All Share Banks sectors.
All fund holdings data sourced from the company fund fact sheets as at end of April 2018