Signs of health have been returning to the UK economy and many investors are betting on a recovery in the banking sector as a result. However Luthman (pictured) says he is still “disenchanted” by the big-name banks such as Barclays, Lloyds and RBS, and is finding more opportunities in companies that are developing banking arms such as Tesco and Sainsbury’s.
The manager praises the business model used by these retailers and says they could be a threat to the big banks because so many people already come through their doors on a daily basis, although he says they are too small to present a systemic risk. He is also attracted to companies such as tiny challenger Metro Bank.
The manager says large incumbent banks will need to lend more to businesses in order to drive growth, but he still feels this is a dangerous move.
“Don’t allow big banks to expand their lending by becoming less prudent. The margins are still depressed. There are better places to be a unit holder,” he said.
Charles Heenan, manager of the Kennox Strategic Value fund, agrees. In a recent interview with FE Trustnet, he said the banking business was an attractive addition to the wider offering from the retailer and Tesco was in a good position to expand into such services.
“The banking business is also quite interesting. You can see Tesco being a one-stop shop for a lot of people,” he said.
However, Luthman admits that investing in the banking sector in this way is harder to do.
“It’s more difficult to invest,” he said. “The companies are either not listed or part of a larger company.”
This means that if investors like the banking business of Tesco or Sainsbury's, they also have to take a view on the overall business, which means there are a lot of other ways the stock can be knocked.
Take Tesco for example. The stock fell further than the market in the June correction and then dipped into the red in mid-December, before receiving a slight boost in the Christmas period, but not enough to bring it ahead of the market. The company has been struggling with unsuccessful foreign expansion bids and unimpressive sales figures.
Tesco made just 3.6 per cent in 2013, more than 15 percentage points behind the FTSE 100.
Performance of stock vs index in 2013
Source: FE Analytics
However, some investors think the relative underperformance of Tesco last year means it could rebound.
Since it is one of the few FTSE 100 stocks to perform poorly last year, valuations are potentially much more attractive than the likes of index-leaders International Consolidated Airlines, which FE Alpha Managers Anthony Cross and Julian Fosh this week warned against buying.
Sainsbury's also trailed the FTSE leaders last year, gaining 10.45 per cent. This was ahead of Tesco but behind the returns of the FTSE 100, according to FE Analytics.
Metro Bank is a company that is currently out of reach of investors. The challenger bank had plans to float this year, but instead raised almost £390m from private individuals and institutions.
Metro has postponed its initial public offering (IPO) on the London Stock Exchange until 2016.
The £358m Liontrust Macro Equity Income fund had a strong year in 2013, outperforming both the IMA UK Equity Income sector and the FTSE All Share, with returns of 29.44 per cent.
It has beaten both measures over one, three, five and 10 years. The fund has made 199.76 per cent since launch in October 2003, more than 50 percentage points more than both the sector and index. It is yielding 3.57 per cent.
Performance of fund vs sector since launch
Source: FE Analytics
Luthman and Bailey say what sets them apart from other funds in their sector is their macro-overlay, which means they take into account global and political events that could derail the growth of an individual company.
“We try to build a portfolio that fits with what’s going on in the world,” Luthman said. “The fund has consistently outperformed the All Share. The macro provided an additional level of comfort.”
“Whether you’re travelling uphill or downhill, if you have a bit of a tailwind, it helps you outperform your peers.”
The managers are currently avoiding traditional income-paying companies such as tobacco and utilities, which they think are overvalued, instead preferring pharmaceuticals and asset managers.
Aberdeen Asset Management, GlaxoSmithKline and Sainsbury’s are all in the fund’s top-10 holdings. Financials make up the largest sector weighting in the fund, at 26.15 per cent of the portfolio, followed by healthcare stocks, at nearly 20 per cent.
The UK is unsurprisingly the largest regional weighting in the fund, though the managers do have 13.34 per cent in North American equities.
The fund requires a minimum investment of £1,000 and has ongoing charges of 1.5 per cent.
