AA-rated UK income star: analysts are wrong on financials
People are spending too much time on fundamentals and not enough on valuations says JOHCM UK Equity Income manager James Lowen.
by Matthew Goodburn on Feb 13, 2013 at 11:57
The JOHCM UK Equity Income managers also think many are overlooking the extent to which financial firms in particular are starting to grow their earnings and profit margins by moving into new areas that require relatively little capital expenditure.
The £1.5 billion fund has continued to prosper from a pronounced overweight to financials, with Lowen (pictured) arguing that many analysts are missing out on how many of these firms are transforming their business models to grow both profitability and dividends.
Plenty more upside for financials
Despite financials being the best performing sector in the FTSE last year, Lowen believes there is still plenty more upside to come for the sector as valuations had fallen to such a low base.
He told Citywire Global: ‘People are spending too much time on fundamentals and not enough on valuations.
The fund’s financials exposure is 12% ahead of the index, with a diverse range of financial services, specialist lenders, non-life and life insurers, and Lowen tips many of these stocks to become even more attractive as they move into what he terms asset light businesses.
Private equity investor 3i, and insurers RSA, Standard Life and Legal & General are all top 10 overweight positions while Aberdeen, Investec and Close Brothers are all key holdings.
The pair like these businesses because they are moving into areas that require relatively little capital expenditure.
Lowen said: ‘Standard Life used to be a traditional life business but it has grown its investment arm [SLI] and has a new platform business. We try to value these as distinct businesses but a lot of the market just looks at embedded value. People are only just starting to realise this with Standard Life.’
The managers added Investec in the last three months as they view it as an extremely fast growing business with a profitable banking and wealth management arm.
‘This company will soon be a FTSE 100 company and [perhaps due to its dual listing] it is only covered by one analyst. We are able to get access to a wealth manager but also to a bank at the cheapest possible valuation.’
A cheap entry point is crucial to the pair, who also operate a strict policy where every stock must yield more than the FTSE average, and any positions that fall below it are immediately sold.
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