A decade after Lehman Brothers failed, what do managers think about banks?
On Monday 15th September 2008, I remember walking into the office, not knowing quite what to expect....
Alastair Mundy, manager of Investec UK Special Situations and Investec Cautious Managed funds, has a well-earned reputation as one of the most disciplined and successful contrarian investors operating in the UK market today. He popped into our offices last week for an update. Here’s what he had to say.
“I describe it as looking in other people’s dustbins for ideas – every now and then we will find something of value that has been discarded.
“We try to understand why conventional wisdom might be wrong and attempt to visualise each company’s future unencumbered by its short-term problems. This is because the negative sentiment is usually already priced in.
“I look for deep value though, not just a company that is a bit cheaper than usual. It’s only when a company’s stock price is exceptionally cheap that I’ll consider it.
“I’m not trying to find a company that is going through a particularly rough time and stay with it until it is the darling of the stock market. I’m happy to invest in a company that is in a truly awful state and stay with it until it is just mediocre. As soon as other investors start agreeing with my stocks picks, to me it’s a sign to sell!”
“I think it’s a more interesting environment than we’ve had for some years. The most predictable behavioural response of investors is their overreaction to negative news. And we are seeing this in abundance at the moment. Investors are reacting dramatically to company news. Travis Perkins, for example, issued a small profit warning as Wickes, one of its brands, has been struggling a bit of late. Shares fell some 13% or more though. Investors just don’t seem to have time for weakness and are thinking about tomorrow rather than months or even years in the future. It’s creating more opportunities for us though.
“There is also the Brexit effect to contend with at the moment. The market has decided Brexit will be bad. UK and global investors are putting off investment until after we part company with the EU and things become clearer. The same happened a few years ago when people thought the eurozone would collapse. But the bad news now – as then – is already priced in and investors missed out on a lot of gains. I’m not saying Brexit will be good – just that the market has priced in a bad scenario already.”
“I’m overweight banks. We’re almost 10 years on since Lehman Brothers went bust and the sector is still very much out of favour. Many of those who were invested in banks a decade ago said they never would again – it was an awful time. I think the emotional scars of investments like that stay with you for a long time, which possibly explains why they have been unloved for so long.
“I owned HSBC at the start of the global financial crisis, although I was underweight the sector overall. But I’ve been telling the same story about Royal Bank of Scotland for around six years now, so I’ve been very ‘early’ – an occupational hazard among value or contrarian investors!
“I think we are just about at the ‘promised land’ now though. Banks have stopped paying their fines, dividends are being distributed once again and some are highly profitable. Many have very good yields (6% or more) and, even with flat earnings, this could result in a nice annual return. Maybe when investors become less excited about ‘growth’ they’ll go back to the sector.
“I also hold a couple of US banks in my Investec Cautious Managed Fund: Citi Group and Bank of America. Banks in the US have very cleverly become more oligopolistic which gives them competitive advantage and better returns than their European counterparts.”
“If you landed here today from Mars – and happened to be an economics expert – you’d look at 2.5% inflation, a growing economy and probably take a guess that interest rates would be around the 3% mark – not 0.75%.
“Today’s interest rate rise gives the Bank of England more room to move if things take a turn for the worse. It was the right move. I think we are way too late in the cycle now to get anywhere near 3% though – it would simply do too much damage.
“Investors seem to be incredibly relaxed about quantitative easing. We’ve had interest rates at emergency levels for 10 years – possibly for so long because central banks just don’t really know how to extricate themselves from the situation. They are making it up as they go along. We just have to hope they get it right.”
Read more about how the interest rate rise could impact your investments.