Funds focused on one particular sector of equity markets can often be subject to wholesale buying or selling behaviour by investors making top-down allocation decisions.
Indeed, within recent memory the financials sector would have been avoided by some investors concerned by the fall-out from the global financial crisis.
However, the sector has been one of the strongest performers over the past year with the FTSE All Share Financial index up by 36.44 per cent for the 12 months to 30 June compared with an 18.12 per cent rise for the broader FTSE All Share. It has also outperformed over three years.
To explore how well financial-focused strategies have fared in recent years, FE Trustnet constructed its own sector of funds with a mandate to invest in this part of the market.
Largely comprising funds from the IA Specialist sector, FE Trustnet’s IA financials sector groups all the equity funds investing in the banking and financial services industries as defined by FE Analytics.
Performance of sector over one year
Source: FE Analytics
Sentiment towards financial stocks, and banks in particular, has turned more optimistic recently as the sector has overcome some of the previous headwinds affecting performance.
In a note last month, Capital Economics assistant economist Daniel Christen said the firm expects global financials to continued improving.
He said: “We forecast earlier and sharper policy tightening by the Fed and Bank of England than is currently being discounted, while the European Central Bank is likely to have wound down its asset purchases by mid-2018.
“The steepening of the yield curve that is likely to result should alleviate the squeeze on banks’ net interest margins they have experienced over recent years.
“More important, however, given the highly cyclical performance of financials, is that this tightening should only occur if economic growth holds up.”
However, he warned there “significant risks” remained for the outlook for financials.
Christen added: “Eurozone political risk has by no means vanished, nor has the region’s large stock of non-performing loans. Brexit also poses risks to European financial stability. But, by and large, we think that prospects for financials are bright.”
With the outlook looking more positive, below, FE Trustnet explores some of the funds in the sector that have performed strongly over several time periods.
Aptus Global Financials
The best performer over one year is the Aptus Global Financials fund, managed by Toscafund Asset Management’s Johnny de la Hey.
The £244.6m fund, which was launched in 2012, is up by 51.72 per cent in the 12 months to 30 June, compared with an average return of 35.25 per cent for the bespoke sector.
According to the firm, the fund aims to deliver capital appreciation with an “attractive, growing income stream” through investment in financial services sector companies. Its key areas of investment include banks, investment banks, insurers and asset managers.
As such, the fund’s top five holdings include E*trade Financial Corporation, Bank of America, Banco Comercial Portugues, Anima Holding, and Deutsche Pfandbriefbank.
The fund joined the IA Global Equity Income sector in October 2016, according to FE Analytics data, the fund has delivered a yield of 4.8 per cent.
Performance of fund vs custom sector over 1yr
Source: FE Analytics
In its most recent fund factsheet, the manager noted that it had reduced its UK exposure in recent months due to uncertainty over Brexit negotiations and the snap general election.
However, de la Hey noted positive developments in the US where the US Treasury’s report on the future of banking regulation called for a more relaxed interpretation of current rules, potentially freeing up more than $2trn of balance sheet capacity. It also followed more positive developments following the Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR), which allowed more than half to increase payout ratios above 100 per cent of their earnings.
Further positive developments were noted in Europe, where “the clean-up of the remaining sick banks” continued.
“It is clear to us that systemic risk is declining just as economic data is improving; opening the door for interest rates to rise,” the manager noted.
It carries an ongoing charges figure (OCF) of 1.33 per cent.
Polar Capital Global Insurance
The five FE Crown-rated Polar Capital Global Insurance fund has topped the performance table over several performance periods.
Overseen by Alec Foster and FE Alpha Manager Nick Martin, the highly-regarded fund is a top pick for many advisers.
Investing in international insurers, the fund targets an attractive total return irrespective of broader economic and financial market conditions.
It tops the table of financials-focused funds over three, five and 10 years. Over three years the fund is up by 77.73 per cent, by 141.52 per cent over five years and has returned 198.81 per cent over the past decade.
Performance of fund vs benchmark over 10yrs
Source: FE Analytics
The fund’s concentrated portfolio of 34 stocks has a 73 per cent weighting towards large-cap stocks with a market capitalisation of $5bn or more. Mid-cap stocks with market cap of between $1bn and $5bn make up a further 23.1 per cent of the portfolio, while the remainder is invested in smaller companies.
More than a third of the fund is invested in the commercial insurance sector, while reinsurers represent 18.4 per cent of the portfolio and retail insurers a further 17 per cent.
The £851.4m fund’s top five holdings include Chubb, Marsh & McLennan, Arch Capital, Markel and Validus Holdings.
“This is a sleepy sub sector of markets that is not widely covered, it is perceived as complex and includes plenty of companies of variable quality,” noted Square Mile.
“The non-life insurance industry where the fund largely invests in can be quite complicated and there can be many different drivers underpinning the performance of company shares.
“Funds with a proven approach and skilful managers are scarce and therefore in terms of the quality this fund offers, we see the strategy as exceedingly good value for money.”
The fund has an OCF of 1.41 per cent. It also charges a performance fee of 10 per cent of the outperformance of the MSCI Daily TR World Net Insurance index benchmark.
Fidelity Global Financial Services
Despite the sector’s specialist nature there are several FE Alpha managers, but the Fidelity Global Financial Services also shares Polar Capital’s distinction of being a five crown-rated fund in the financials-focused sector
The €1.1bn fund is managed by FE Alpha Manager Sotiris Boutsis and aims to provide long-term capital growth by investing at least 70 per cent of the portfolio in shares of global financial services companies.
The fund has been a solid performer over various time periods, although it is offered by the asset manager as a long-term strategy.
Over five years the fund has returned 123.52 per cent, although over 10 years the fund has returned a more modest 74.4 per cent. Indeed, long-term performance for many funds in the specialist sector was hindered by the global financial crisis, which caused banking stocks to crash.
As an FE Alpha Manager, Boutsis has performed better than the IA Global peer group composite – where the fund resides.
The largest holdings in the portfolio include US banks JP Morgan Chase, Citigroup and Bank of America, German insurer Allianz and Spanish bank Caixabank.
The fund has an OCF of 1.07 per cent.
The other FE Alpha Manager in the custom sector is Jupiter Asset Management’s Guy de Blonay, who manages the Jupiter Financial Opportunities, Jupiter International Financials and Jupiter Global Financials.
His highest-rated fund the Jupiter Global Financials, which has four crowns, has returned 32.44 per cent over the past 12 months, 56.58 per cent over three years and 124.22 per cent over five. The fund has also fared well longer-term with an 86.75 per cent gain. It has an OCF of 0.95 per cent.