Europe’s stricken banks may have been desperate for the €800 billion liquidity injection they were handed by the European Central Bank (ECB), but Henderson’s John Bennett says the stocks are still ‘hated’ by active managers.
Speaking to Wealth Manager, Bennett says that although the ECB’s two long-term refinancing operations (LTRO) have proved popular, they had turned the Continent’s lenders into a ‘massive warrant’, and a geared play on sovereign debt.
‘These banks were starving for a solution, starving for liquidity and starving for their balance sheets to be liquefied,’ he says.
‘The reason [the LTROs were popular] is that it backstopped the situation. Europe was crying out for some sort of backstop to be put in place.
‘Whether it’s a lasting solution, I doubt it. It has made European banks morph into a leveraged play on sovereign credit.’
Before the first LTRO was launched by ECB president Mario Draghi in December, Europe’s banks were priced for catastrophe.
But even despite the offer of ultra-cheap loans – which were taken up by about 500 banks at the end of last year then by a further 800 at the second LTRO in February – Bennett said it will not pay for fund managers to bet heavily against the newly liquefied sector, despite the ECB’s operation only offering a temporary reprieve.
He argues: ‘I am not convinced the liquidity rally is going to come crashing to an end, but when you’re banging something against a wall and then you stop, the pain goes away, and that’s what this is.
‘I think there was a very big chance of a European bank going down before Christmas and that’s why LTRO came along,’ he continues, adding that while he remains underweight the sector, he has reduced this in recent months.
Active managers still sceptical on banks
Although Bennett has reined in his bearish stance on the unloved sector, he says that most active European managers remain sceptical about the prospects for recovery in the region’s financials and includes himself firmly in this camp.
He explains: ‘I think most active managers in Europe, if they’re honest, kind of hate the banks. The banks and the insurers are about 20% of the benchmark, you are measured against the benchmark, and they are all warrants.
‘To a greater or lesser extent, they are all leveraged business models and in the case of the banks they are leveraged into sovereign credit. This means you have to keep an eye on French GDP, Spanish GDP … so we don’t really like them.
‘I take the view it doesn’t pay me to be [very] underweight the banks, so I’ve narrowed on that a bit. I’m still underweight, as I don’t think they’re investments. I think they are tradable for a time,’ he says.
Bennett took over Henderson’s European Focus Trust late in 2010, following the sudden departure of Roger Guy from Gartmore, the asset manager that previously ran the £112 million portfolio.
With Guy at the helm, the trust performed on a par with its FTSE World Europe (ex UK) benchmark, with both delivering 66.2% between April 2009 and December 2011.
Although posting a slight 1% loss during his first year in charge of the closed-end fund, Bennett has substantially outperformed his comparator index over a stretch that included a severe summer crash that wiped double digit percentage points off equity markets globally.
Over the 12 months to February 2010, Bennett’s benchmark fell 9.42%. However, the manager shielded his trust, which trades at 561.5p a share and a -13.9 % discount, from the bulk of these declines and kept losses to a minimal -1.42%.
Driving these numbers was Bennett’s bet on pharmaceuticals, which account for some 30% of his trust’s portfolio.
He moved overweight the sector in the teeth of the liquidity rally in April last year, when it was considered contrarian to back defensive pharmaceuticals.
‘Pharmaceuticals are a contrarian play, but an investment I expect to be in the trust for years,’ Bennett says, adding that he used this year’s weakness to top up his exposure to the sector. He also thinks that technology names such as SAP are cheap enough to deliver strong returns over the next five years.