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Now's the time to buy bank shares, says Standard Life’s Cumming

David Cumming, head of UK equities at Standard Life Investments, hopes this week marks a low point for Barclays, Lloyds and RBS as he thinks the banking sector is very undervalued.

 
Now's the time to buy bank shares, says Standard Life’s Cumming

Just as it seemed sentiment towards the banking sector couldn’t get much worse, the Libor scandal has rocked financial stocks, and the fallout looks set to continue.

Although many investors question the sense of buying shares in banks at the moment, David Cumming, head of UK equities at Standard Life Investments, is optimistic on the recovery of the sector.

‘One of the main overweight positions we have is in the banking sector,' Cumming said. 'Valuations are very low as they’re trading at half their book value, so the market is taking a very negative view on their ability to make decent returns in the longer term.

‘As they roll off the bad debt and the non-performing loans that they had in 2008 the cleaner banks are capable of making quite decent returns on cash or equity, and therefore when you look to 2014, I don’t see any reason why these banks can’t trade at book value.’

Cumming manages the Standard Life Investments UK Equity Recovery fund, which is 27% invested in financials with Barclays (BARC.L), RBS (RBS.L) and Lloyds (LLOY.L) accounting for three of its 10 biggest positions.

These holdings have taken a toll on the fund recently, which has underperformed its benchmark with a total return of 20.2% over the past three years compared with the FTSE All-Share's total return of 36.1%. Cumming did briefly hold a Citywire A performance rating at the end of last year and earlier this year.

The Libor debacle has further affected the fund, which has a 5.7% holding in Barclays. However, despite the £291 million fines imposed on the bank, and others banks being put under the spotlight, Cumming remains bullish on the outlook for the sector.

‘Although this week's events have obviously had an impact on the share price of Barclays and other major UK banks, in the longer term we continue to be positive on the outlook for financials including Barclays’, he said.

Cumming says the success of banking stocks depends on a number of issues. ‘This position is more sensitive than most to worries about the eurozone. The regulatory environment has been tough for banks as they have to hold more capital,' he said. 

'Now I’m hopeful they’ll be a little less aggressive on capital ratios as if you want the economy to recover you have to encourage the banks to lend. Although they’re not perfect they’re managed and regulated in a way that is less risky than it was five or six years ago.’

Cumming has made new acquisitions in the portfolio as equities continue to be cheap. ‘Equities are very cheap. The problem is we’ve had 10 years with equity markets going nowhere and it has been very volatile, so it’s a very unfavoured asset class.

‘We bought a few more financials. We’ve added to Aviva (AV.L) where there has been a management change and it looked very cheap. We bought back a bit into Rio Tinto (RIO.L) having sold out at the start of the year as that sector has been pretty weak. We bought Schroders (SDR.L) and consumer cyclicals so Dixons (DXNS.L), GKN (GKN.L), Easyjet (EZY.L), ICAG (IAG.L) are all stocks we quite like.’  

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19 comments so far. Why not have your say?

Ron

Jun 29, 2012 at 16:18

A rated an E would be more appropiate.

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John Osborne

Jun 29, 2012 at 17:45

An old fund manager can buy bombed out bad stocks, label them as "countercyclical recovery situations", and underperform, blaming the economy, time of the moon, any excuse. Am getting tired of these people trotting out the same excuses for their poor investment decisions. 20% return compared to index 36% says it all.

After all, It is not his money, and he is still payed at least £100K+ pa plus bonuses no doubt.

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Franco

Jun 29, 2012 at 17:46

The manager of a fund overweight in banks, is tipping the banks to outperform. Now, that is a surprise.!

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IainE

Jun 29, 2012 at 17:48

Unfortunately he is talking his book The banks are a disgrace ethically and performance wise. It now appears that most of their earnings over the past bull cycle were made at the expense of one sector of society after another -- exhorbitant overdraft rates, high credit card interest rates, low interest rates to savers, PPI mis-selling, exchange rate asymerical hedges, fixing LIBOR etc. and now they are having to give it back. Given that performance why would anyone believe that they can turn an honest penny?

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snoekie

Jun 29, 2012 at 18:22

I have enough Lloyds and some RBS and HSBC.

I need income, not promises of cake and cream tomorrow. Pie in the sky will not feed me today!

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William Hunter

Jun 29, 2012 at 19:30

Remind me not to follow David Cumming - what next after NatWest, Libor fiddle & now Swop fiasco? Sorry, but this gentlemen must be avoided at all costs! Perhaps we should all listen to the Governor of the Bank of England for sensible direction on the Banking industry.

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Ken Adams

Jun 29, 2012 at 19:45

To own banking stocks because they are cheap seems to me to be as morally repugnant as these self interested mobsters.

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william Westlake

Jun 29, 2012 at 20:14

Ken Adams......er...could you explain please?

It sounds as if you think I need to go and have a chat with my local priest about my Lloyds holding.

What is it that you think the vicar will have to say on the matter?

Please enlighten me

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martin cragg

Jun 29, 2012 at 21:46

So, John Osborne thinks fund managers are paid £100k. Get real John! Multiply that by 5-10x and you are nearer the mark. Ludicrous rewards for their generally poor performance.

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imran Alam via mobile

Jun 29, 2012 at 21:49

Ken your an idiot with a comment like that.

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Robert Court

Jun 30, 2012 at 08:09

As long as they don't go bust corporate bank bonds can give both a decent income and a good capital gain on maturity.

The yield goes up as the purchase price goes down so this gives one the opportunity to lock into a higher income and convert 'bad news' into 'good news'.

More 'bad news' please!

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Mark Lance

Jun 30, 2012 at 09:10

Well Ken I buy stock because it is cheap, as to invest is to get the best return, so while they have been hit with another miss selling scandal I have topped up my Barclays holding in my Sip and in upto 20 yrs time it will be interesting to see how it has performed

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Raj Thamotheram

Jun 30, 2012 at 10:44

Given Standard Life's previous comments and performance on Barclays, I am not sure I trust this advice. Which incidentally sounds very similar to the buy BP comments after GoM.

To say "Barclays have responded constructively to our concerns and we now intend to support the remuneration report at next week's AGM” and that they were “pleased” with the outcome is quite strange for an investor that seeks to show a deep understanding of the companies in which it invests. And especially for a manager that prides itself on having good corporate governance credential. Which it does, generally.

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/9214266/Barclays-changes-terms-of-CEO-Bob-Diamonds-bonus-after-pressure-from-shareholders.html

It’s obvious to all who care to look today that exec pay is the key way that investors enable banks to be dysfunctional and take-on excessive levels of risk:

http://blogs.law.harvard.edu/corpgov/2012/02/01/executive-pay-and-the-financial-crisis/

Of course, Standard Life were not alone. 73% of investors either actively or passively supported the pay deal. But being part of the herd is no excuse.

Will Standard Life now be pushing for claw back of bonuses as per NAPF’s recent statement and will this include the BarCap period and all the key players, not just Diamond?

http://www.napf.co.uk/PressCentre/Press_releases/0220_Barclays_and_Libor_NAPF_comment.aspx

Will they be pushing for a clean slate at the top as even the FT editorial calls for?

http://www.ft.com/cms/s/0/6dc5b9a2-c117-11e1-853f-00144feabdc0.html

And will they be more assertive with other ridiculous bank pay deals and other obvious failures of corporate governance, even if the company is delivering “great returns” or is otherwise a City favourite?

Until we are clear that Standard Life and other the investment managers who acted as enablers of Bob Diamond’s dysfunctional leadership of Barclays – what the FT editorial rightly calls a “rotten culture” – have really learnt the key lessons, I’d tend to ignore their advice to buy.

Trust in banking sector is awful and falling – as Vince Cable says the City is a “massive cesspit” in need of cleaning up. The fact that the banking sector is one of their “main overweight positions” may be getting in the way of some investors seeing this. As Upton Sinclair said several decades ago: “It is difficult to get a man to understand something, when his salary depends on his not understanding it.”

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Ken Adams

Jun 30, 2012 at 15:03

In reply to William Westlake, I agree my comment was intemperate outrage. For which I apologise. I am not arguing for consulting Vicars.

For Banks, I don't think normal investment rules apply because bankers would probably break them as well. That it seems to me that to boast that you own large quantities of Bank shares which are cheap because many people have sold rather than face being an employer of corrupt crooks. Stocks of a sector which Mr King describes as belonging to a broken system, is surely not a feasible investment strategy and merely demonstrates the arrogance present in the City of London. I much preferred Mr Peaks comments and so would fell much happier investing with him rather than LG. So he has shot himself in the foot.

If you really do own Lloyds bank shares: a) I feel for you; b) recommend that you consider selling these tainted stocks as soon as possible. Because their values are bound to fall, in the short term, and they pay no dividend due to a previous chancellor and PM suckering the previous chairman into buying Halifax which then required eye watering sums to absorb the losses on.

To the Mark Lance who owns Barclays shares in his Sipp and intends to hold on to them for twenty years, I would simply say fair enough, beause if we are stuck with the present bunch for twenty years they will have gambled away all our money anyway. This, though, lies well outside the usual investment horizon of fund managers, which is what is under discussion.

A better strategy however would seem to me to sell short term, wait until the present lot have been sent on their way, or to jail, and then buy back.. I am far from convinced that Barclays will be revealed as the worst offender in this bleak picture.

I am also heartened by the fact that many contributions to this thread seem to agree, see for example the previous. post.

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stiff watt

Jun 30, 2012 at 23:05

The overwelming cynicism from readers seems justified.

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Raj Thamotheram

Jul 01, 2012 at 02:01

I don't feel cynical. I do feel angry.

It's useful to remember that this is far from being an isolated case.

79% of FTSE 350 companies report seeing no increase in meaningful engagement following the introduction of the UK’s Stewardship Code in 2010. And the remaining 21% report only a slight increase.

http://www.ft.com/cms/s/0/9ec5594c-6f8f-11e1-b368-00144feab49a.html

So yes, I'm increasingly irritated at the blah blah of the fund management industry:

http://www.investmentuk.org/press-centre/press-releases/press-release-2012-06-13/

And I'm certain the public deserve higher levels of professionalism from a sector which is so powerful and so well resourced Plus the change that's needed isn't rocket science. Here's an article I co-wrote with a former US banker!

http://www.responsible-investor.com/home/article/fin_cri_blog/

So I'd be very interested to hear what this ad-hoc "focus group" thinks of the last article in particular - ie what you would like institutional investors to be doing as investors in/owners of the sector.

You may know that as we speak about 15% of the world's inst investment community is meeting to discuss how to support good corporate governance and be more responsible investors. 15% of any community could be a tipping point.

http://www.responsible-investor.com/home/article/pri_in_person/

https://www.icgn.org/conferences/item/945

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Some Random Dude

Jul 01, 2012 at 23:51

PPI Claims..

*cough* cough LIBOR claims is going to be next write off for the banks..

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John Osborne

Jul 03, 2012 at 11:41

martin cragg

I thought the point I was making was that David Cumming was part of the long list of underperforming overpaid fund managers trotting out excuses justifications and dubious predictions despite letting down his investors.

I would add this is particularly surprising in his case as he is head of UK equities at SL so should have had a better strategic view than investing in opaque bank shares too early.

Raj Thamotheram

. . . which brings me to the next point. If investors were more aware of how much fund managers and their groups were earning for underperformance, then should they be surprised that these same groups support the corrupt pay structures of the companies in which they invest their clients' savings?

More finance education plus greater transparency may bring us towards your "tipping point" but without more government support through change to company law and better education I think we are some way away yet. Only a start has been made.

We are angry and fed up with all of this .

Personally I also think the "open door" policy which has allowed large swathes of our key industries and infrastructure to have been sold in effect to finance similarly corrupt government and industry coffers is part of the same malaise. Fund management industry block votes allowed this to happen in many cases.

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Raj Thamotheram

Jul 03, 2012 at 12:02

Martin, very good points.

And its interesting to be having this discussion on the day that Diamond has left. Interestingly the inst investor blogs that I am part of are totally quiet about Barclays!

Look, the bottom line as the US economist and Nobel Prize winner Herbert Stein said: "If something cannot go on forever, it will stop." We are at/near this point today on many fronts, some which we can easily see (banks) and some which we try not to see (climate change). That doesnt make it comfortable or even safe but given the mistakes over several decades, I guess it couldnt be an easy transition. Too many vested interests hanging on - as Bob tried to - to power.

One of the things that gives me hope is this great paper published by Mrs Thatcher's favourite thinktank, CPS, with a rather good title: "Put the Savers First!"

http://www.cps.org.uk/files/reports/original/120613094539-Putthesaverfirstabridgedversion.pdf

He shines light on many of the "dysfunctional" aspects of the industry. And whilst he doesnt focus on the negative impact of inst investors in terms of environmental, social and governance externalities - like supporting Barclays approach to pay & risk - he does endorse FairPensions drive to redefine fiduciary duty. Importantly he doubts that voluntary change will work and highlights the unhelpful role played by the IMA.

Whats exciting is that Fidelity supported this project and clearly havent sought to water it down. And the foreword has a warm welcome from 2 respected peers, one Labour and one Tory (who is also one the board d of a fund manager).

Start of a cross party coalition for real change?

After all with savings, aside from the uber-rich, we really are in it together!

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