View the article online at http://citywire.co.uk/money/article/a658487
Analysts are wrong on financial shares says £1.5bn investor
Many financial companies are transforming their businesses, says JOHCM UK Equity Income fund manager James Lowen.
Many investment analysts and managers are failing to take account of company debt when valuing companies, top performing fund manager and financial sector enthusiast James Lowen has warned
Also being overlooked, says the Citywire AA-rated fund manager, is 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 JOHCM UK Equity Income fund that Lowen manages alongside Clive Beagles, has continued to prosper from a pronounced overweight to financials, with Lowen 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 shares can continue to rise as valuations had fallen to such a low base.
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. 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 (III.L), and insurers RSA (RSA.L), Standard Life (SL.L) and Legal & General (LGEN.L) are all top 10 overweight positions while Aberdeen Asset Management (ADN.L), Investec (INVP.L) and Close Brothers (CBRO.L) are all key holdings.
Lowen and Beagles 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.
The pair have been adding to their positions in Standard Life and L&G, as well as to specialist lender Intermediate Capital (ICP.L), but while they hold HSBC (HSBA.L), they have a 4% underweight to banks as a whole.
The Citywire guide to investment trusts
In association with Aberdeen Asset Management
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Look up the funds
Look up the shares
- Standard Chartered PLC (STAN.L)
- Legal & General Group PLC (LGEN.L)
- Intermediate Capital Group PLC (ICP.L)
- HSBC Holdings PLC (HSBA.L)
- ITV PLC (ITV.L)
- Standard Life PLC (SL.L)
- Aberdeen Asset Management PLC (ADN.L)
- RSA Insurance Group PLC (RSA.L)
- Investec PLC (INVP.L)
- Close Brothers Group PLC (CBRO.L)
- 3i Group PLC (III.L)
Look up the fund managers
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- JOHCM UK Equity Income
- JOHCM’s Lowen: Standard Life will see revenue ‘explosion’
- 2012 consumer outlook is looking up for investors, say JOHCM managers
- Defensive stocks 'monstrously overvalued', Clive Beagles warns
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