The manager has been buying HSBC, Lloyds and Barclays recently for his £125m GLG Undervalued Assets and £73m GLG UK Income funds.HSBC is currently the largest position in GLG Undervalued Assets with Lloyds the eighth largest.In the income fund HSBC is the fifth largest holding.
Dixon took charge of the two GLG funds in November 2013, but still runs FP Matterley Undervalued Assets.
He says the retail banking sector has the most opportunity to re-rate out of any other within the FTSE 100.
“They are very out of favour, incredibly out of favour. Lloyds, Barclays and HSBC are all an excellent play on a stronger dollar and higher short-term interest rates,” he said.
“Typically we would expect to see HSBC re-rate – with earnings [currently] about 15-20 per cent too low - on a two-year view, but all the while in you are being kept interested with a five per cent yield.”
“With Barclays you will see about a 20 per cent discount to book value as something that can definitely grow and close [over two years], so with that you're looking at around a 25 per cent return potential.”
Lloyds, Barclays and HSBC have been amongst the worst performers in the FTSE 100 since the fall of Lehman Brothers ushered in the financial crisis in 2008.
All three stocks have struggled to make back their losses over the past six years, since the market sold off. HSBC is currently up 0.1 per cent while Barclays is still down 15.51 per cent and Lloyds is down 47.14 per cent.
Performance of stocks over 6yrs
Source: FE Analytics
By comparison, the FTSE 100 has risen 55.93 per cent over this period while the FTSE All Share has gained 62.2 per cent.
Investigations at home and abroad against the banks have resulted in a slew of fines and penalties, ensuring that their share prices have struggled over the course of 2014. HSBC is marginally up while Barclays and Lloyds are down 15.15 and 2.93 per cent since the start of the year.
Performance of stocks in 2014
Source: FE Analytics
However, Dixon is untroubled and expects the stocks to rebound over the next few years.
“It is one of the key things that gets us excited about shares - when prices come under pressure and we have seen that in abundance. Even though the news flow has been so overwhelming appalling, we think the next bit of news might marginally surprise on the upside.”
“You should also never underestimate how powerful the turning of sentiment can be for share prices,” he added.
The banks also face major competition from the 28 so-called ‘challenger’ banks currently under construction as well as an impending higher interest rate environment.
“Challenger banks are a good thing for the banking industry but I still think there is enough with regards to net interest margins and, crucially, there is enough baked into prices for them to be exciting.”
“People are always saying about rising interest rates but the ability of a bank from its deposit base to make an awful lot of money in a rising interest rate environment is very good.”
Since the manager launched the GLG Undervalued Assets fund in November 2013 it has returned 11.5 per cent while the IMA UK All Companies sector average is 4.41 per cent and the FTSE All Share gained 5.22 per cent.
Performance of fund, sector and index since Nov 2013
Source: FE Analytics
The manager has also demonstrated significant outperformance on FP Matterley Undervalued Assets, which he has run since August 2008.
During this period the fund made 97.87 per cent, beating the sector average and index by 40 percentage points.
Performance of fund, sector and index between Sep 2008 and Oct 2013
Source: FE Analytics
Dixon’s deep value bias has meant a more volatile performance than the fund’s sector and index though and it lost more in the downmarket periods of 2008 and 2011.
Dixon struggles to see easy sources of value in other parts of the market: “Broadly speaking as I look at the areas of opportunity within the FTSE 100 - apart from banks - they are things that you'd struggle to replicate: Vodafone and some consumer cyclical such as IAG and Carnival.”
The manager is not the only contrarian manager to have recently bought the banks. Richard Buxton, manager of the £1.5bn Old Mutual UK Alpha fund, has been holding the stocks since the beginning of the summer.
HSBC, Lloyds and Barclays are Old Mutual UK Alpha’s second, fourth and tenth largest holdings while financials make up a total of 31.96 per cent of the portfolio.
The GLG UK Income fund has ongoing charges of 0.95 per cent, while the GLG Undervalued Assets fund has an annual management charge of 0.96 per cent.
