‘Where there is one cockroach, there are usually a lot more.’ So says Citywire AA-rated Mark Martin, Neptune’s head of UK equities and manager of the £167 million Neptune UK Mid Cap fund, of his underweight position in financials.
Financials account for 26.6% of the FTSE 250 excluding investment trusts, but represent just 2.5% of Martin’s fund.
The cockroaches are a reference to the scandals that continue to plague the banks, one reason for Martin’s avoidance of the sector. Most recently these have centred on FX departments, with Deutsche Bank, Barclays, Citibank, RBS, Standard Chartered and JP Morgan among those taking disciplinary action against currency traders.
Martin Wheatley, chief executive of the Financial Conduct Authority (FCA), said last week that the allegations of FX rigging are ‘every bit as bad as they have been with Libor’, the manipulation of which has so far cost banks more than £3.5 billion in fines.
Then there is the lingering issue of payment protection insurance, with Lloyds recently setting aside another £1.8 billion for compensation and so having to delay its plans to resume paying dividends.
An added problem for Martin is the ‘slightly murky world’ of banks’ operations and liabilities. ‘I don’t know – and I suspect sell-side analysts don’t know – what’s on their balance sheets,’ he remarked.
Finally, Martin dislikes industries such as banking that are subject to broader political and regulatory risk.
With the asset managers and wealth managers that are more prevalent than banks in his mid-cap space, Martin professes to have no qualms – he holds Rathbone Brothers – but he sees more attractive balances of risk and reward elsewhere.
Where? He offers two examples of deep value available at the moment, which happen to have Holland in common. One is Shanks, a waste manager with significant operations in the Netherlands that have been depressed by the country’s weak construction sector. The other is Carpetright, which too has been laid low by its struggling Dutch business.
Of the market in general, Martin is sanguine about valuations despite the long rally. By his reckoning the FTSE All Share index trades on a forward price-to-earnings (P/E) ratio of 13.3, which he contrasts with the Italian market’s multiple of 13.1 despite that country’s woes.
Martin points to research indicating a strong correlation historically between such valuations in the UK and subsequent returns, which from a starting P/E of 13 have tended to be followed by annualised returns of around 7% through the next decade.
He concedes, though, that he is now less risk tolerant than he was in 2009 and 2010. Then he snapped up cheap stocks, which has propelled him to the absolute pinnacle of the IMA UK All Companies category on a three-year view. Through that period he has returned 94%, compared with 34% from his peer group and 49% from the FTSE 250.