UK banking stocks have been among the biggest beneficiaries of the improving economic backdrop and the increasing appetite for risk among investors.The real success story over the last few years has been Lloyds, with other UK banks – such as Barclays and RBS – largely falling by the wayside.
However, Davies says Barclays now represents the biggest bargain in the sector and has 5.31 per cent of his Undervalued Assets fund and 4.76 per cent of his UK Growth fund in the stock.
“We have a big position in Barclays, which I think is the standout value stock in the market today,” Davies said.
While Barclays did not get bailed out by the Government like other UK banks after the financial crash, it has still been involved in other scandals which have negatively affected it, such as PPI claims and banker bonuses.
Shares in Barclays had shown signs of recovery in recent years, as the graph below shows, but the stock sold off drastically this year after it posted its first annual loss for more than decades.
Performance of stock vs index over 2yrs
Source: FE Analytics
The major reason for its poor performance, experts say, is because of Barclays’ investment bank operations – which it had acquired from Lehman Brothers – rising costs and falling profits.
However, Davies says that that part of the business is now so lowly valued that if investors were to buy shares in Barclays they would be buying the investment banking division for nothing.
“As always is the case, the reason it is now such good value is because it has done so poorly of late. However, with its share price down there, its investment banking arm is effectively valued at zero.”
“Barclays Retail and Barclaycard are excellent businesses that are generating good returns on capital and the investment bank still faces challenges, but it is much more of a self-help story than anything else. Of course, they are not guaranteed success, but it’s within their grasp.”
He added: “If they were to have any sort of success in turning it around, then that would really boost the share price because the market views it as worthless.”
Barclays is also one of the only UK banks currently paying a dividend. According to FE Analytics, there are more than 120 IMA funds that count Barclays as a top-10 holding.
These include Schroder Income, Fidelity Special Situations, R&M UK Equity Long Term Recovery and BlackRock UK Special Situations.
Lloyds is Davies’ largest holding in his Undervalued Assets and UK Growth portfolios. It makes up approximately 8.5 per cent of each one.
The manager has backed the stock for a while now and told FE Trustnet last year that not only was it one of the first banks to lift itself out of the mess of the crisis, but that it would be one of the major beneficiaries of the housing market recovery.
Performance of stock vs index over 1yr
Source: FE Analytics
Investors who bought Lloyds a year ago would now be sitting on a return of 60 per cent, but its share price is a long way off reaching its pre-crisis highs.
However, the Government has already begun selling off its stake in the bank and its management team has told the market that it expects to pay a dividend again this year.
The shares in Lloyds are currently just below 80p, but Davies thinks they can move much higher.
“I still think Lloyds has plenty of upside,” he said. “Our current target price for Lloyds is just north of £1, but we can see it going higher than that. There is evidence to suggest that not only will they be able to pay out a dividend but it could be as much as 7p per share.”
He added: “If that were to be the case, then I could see our target price being well above £1.”
The manager also holds RBS, which he describes as Lloyds' badly behaved cousin. The stock has performed poorly, having lost 18 per cent over the last six months.
FE Alpha Manager Guy de Blonay, who also runs funds at Jupiter, recently told FE Trustnet that he was avoiding RBS because of the turmoil surrounding its investment banking division.
While Davies says the company still has a lot more to do, he is happy to hold it within his Undervalued Assets fund.
“RBS is comfortably the smallest position out of our UK banks. We think it can start to perform more and more like Lloyds, but it is still very challenging,” Davies said.
Davies is eyeing up TSB, which will float in the next few months, as he looking to diversify his UK bank exposure.
Nevertheless, the manager says he has been disappointed by this year’s IPO market. He says that the companies that have floated have been very interesting and are very good quality businesses, but their valuations have largely been unappealing.
Davies took over his £128m Jupiter Undervalued Assets fund in January 2012 and joined Ian McVeigh as co-manager of the Jupiter UK Growth fund a year later in January 2013.
Performance of fund vs sector and index since Jan 2012
Source: FE Analytics
According to FE Analytics, his Undervalued Assets fund has been a top quartile performer in the IMA UK All Companies sector since he took over, with returns of 58.03 per cent.
Its FTSE All Share benchmark has returned 31.21 per cent over this time.
The fund’s clean share class has an ongoing charges figure (OCF) of 1.02 per cent.
