The manager of the £1.4bn Jupiter UK Growth and £125m Jupiter Undervalued Assets funds is bullish that banks can bounce back to their former glory days after they saw huge falls in the run up to and the aftermath of the financial crisis.
The likes of Barclays and Lloyds saw significant losses in 2007 and 2008 with the latter having to be bailed out by the taxpayer, which remains its largest shareholder with around 24 per cent of the bank’s total stock.
According to FE Analytics, all of the ‘big four’ UK banks – Lloyds, HSBC, Barclays and Royal Bank of Scotland – saw huge falls in their share prices. HSBC lost a ‘mere’ 60 per cent, with the other three losing more than 90 per cent and 97 per cent in the case of RBS.
Performance of stocks and index over 10 years
Source: FE Analytics
Since the stocks bottomed out in March 2009 they have made some strong gains but still languor below their previous highs.
Performance of stocks and index since 2009
Source: FE Analytics
Davies says while all four have somewhat bounced back since these dark days, in particular Barclays and Lloyds have much further to run.
“It is the one clear value opportunity left in the UK stock market. Back in 2012 there were lots of stocks that you could think you will make 50 to 100 per cent on a two-year time horizon but most of these have gone,” he said.
“The UK banks look very appealing and we have had very good news coming out of them in the last few weeks. The good bits of the banks – the retail side – are getting better.”
“It is a huge opportunity for them to be more profit-efficient with them using technology more effectively. The bad bit – the headline grabbing stuff – has been cut back, dramatically. We have seen what Royal Bank of Scotland are doing, Barclays have seen a huge amount of activity in the last six to 12 months.”
“We are now getting to the point where they are starting to become profitable and returning these profits to shareholders in the form of dividends. Ok, Lloyds’ dividend was not very big but it was very significant moment.”
Lloyds recently announced it would pay its first dividend since 2008, at 0.75p per share for 2014, which is about a 1 per cent yield. Davies says over the medium term, he expects this to rise to about 6p per share. He says this would boost the share price to around 120p per share, from its current 79p.
"There are not many opportunities like that out there. These deep distressed value opportunities are the icing on the cake but there are plenty of other good solid growth stories,” he added.
While very much focused on growth stories, the manager adds that there is currently a real challenge for income investors who are tilted towards UK stocks and says they may soon wish to consider banks.
"It is quite a narrow range of stocks that they rely upon," he said.
Financials are one of the biggest bets Davies has made across both of his funds. They represent about a third of Jupiter UK Growth and more than a quarter of Jupiter Undervalued Assets, representing an overweight to the FTSE All Share.
Davies has Barclays, Lloyds and Legal & General as top positons in both Jupiter UK Growth and Jupiter Undervalued Assets’ portfolio, making up a combined 20 per cent or so of each fund – a high conviction amount for three stocks.
Graham Spooner, investment research analyst at The Share Centre, says ongoing worries for further fines are a worry for investors, both private and professional.
“Barclays [recently] announced results slightly above market expectations, however, the bank’s fines have grabbed the headlines. News of further PPI provisions of £200m and an additional £750m set aside for an investigation into foreign exchange markets will disappoint investors.”
“Barclays is continuing to restructure and the CEO has shrunk Barclays’ investment arm in order to move away from its dependence on investment banking. The bank is also continuing to make progress to achieve its 2016 targets. However, investors should note progress is likely to be slow.”
“Long-suffering investors will focus on the CEO’s ongoing restructuring, but the sector is still under a cloud and with the uncertainty over the investment banking division we would recommend that there are potentially better opportunities elsewhere.”
Davies is the sole manager of Jupiter Undervalued Assets and co-manages the Jupiter Growth fund with Ian McVeigh, who has managed the fund since 2003.
Over the past three years both funds have beaten their sector and made more than double the gain of the FTSE All Share index.
Performance of funds, sector and index over 3yrs
Source: FE Analytics
Jupiter UK Growth and Jupiter Undervalued Assets have respective clean ongoing charges figures (OCFs) of 1.04 and 1.02 per cent.