Financial Express Research analyst Harpreet Sajjan says this view is based on analysis of the r-squared ratio, which is usually used to measure how closely a fund is correlated to an index or benchmark.
The data suggest the r-squared for the entire IMA UK Equity Income sector as measured against the FTSE All Share went from 0.81 in the period 13 October 2006 to 13 October 2007, to a score of 0.97 in the period 30 September 2007 to 30 September 2008.
Sajjan adds that the correlation is all the more important because of the weight of financial stocks, which make up about 22% of the All Share index.
"Given that r-squared and correlations between funds and the index are increasing, you will notice, when looking at those funds with the highest r-squared scores, that they are maintaining that 22% exposure to financials, meaning they are directly impacted by the banking crisis. This is a key reason why they have performed poorly."
Sajjan says that it is not just managers in the UK who are following a strategy that is bringing them closer to the performance of indices and relative benchmarks. It is, for example, highly noticeable in Europe. He says this is happening because fund managers do not want to risk straying away into over- or under-weight positions in specific sectors in case they get the bets wrong.
"A bear market is a time when we see fund managers getting as close to their indexes as possible. The reason for this is because most fund managers measure their performance on relative terms - so if index goes down 30% and their fund does the same, or only falls 28% - they will claim they have outperformed with a positive Sharpe - and good figures for any ratio that takes benchmark performance into consideration - meaning these ratios are meaningless in this environment."
The changes spotted by Sajjan are not surprising as over the past 12 months fund managers looking for total returns from UK equities investments have had to look increasingly to the dividend as a proportion of returns, given falling share prices, and this in turn has focused their activities on traditionally defensive stocks such as the big banks, pharmaceutical, oil & gas, and utilities.
But this has boxed many in the sector into a corner: the FTSE 100 and All Share dividend yields are widely expected to fall in coming months. Just this morning Barclays announced that as part of its negotiations with the government and the FSA to ensure the strength of its so-called Tier 1 capital, its board would recomment the scrapping of the final dividend, worth about £2bn to shareholders, which would have been paid out in April 2009. The banks says it intends to restart dividend payments in the second half of 2009.
Meanwhile, the ability of fund managers to continue holding financial stocks will be threatened by the government's massive holdings, which may run counter to particular mandates fund managers have, and which do not seem - on today's evidence - to be a way to stop the consolidation ongoing in the bankings sector. The merger of HBOS and Lloyds, for example, may create a strong bank, but managers will be wary of holding too much of its stock relative to both the banking sector overall, as well as wider FTSE 100 and All Share weightings, if they are to abide by mandates relating to risk and diversity of underlying assets in their portfolios.
However, this is really a case of a double-whammy, as according to the technical aspects of the government's bailout of the banks, it is likely that any future profitability will be channeled the way of the government as an investor well before it trickles beyond into the pockets of institutional or even private investors in banking stocks.
Financial services secretary Paul Myners has again sought to push the government's line that its actions are the result of seeking to inject confidence into the financial system - a theme much repeated yesterday by prime minister Gordon Brown after the EU meeting of heads of government that has resulted in member states agreeing to implement the UK model for saving banks in their own jurisdictions.
"The steps announced this morning are entirely consistent with the plans outlined last Wednesday," Myners said at a HM Treasury briefing on Monday 13 October.
This suggests the objective remains to take a stake in the future health of the financial system in order to ensure business in areas such as UK residential mortgage lending can move forward from their current state of paralysis.
As the HM Treasury document outlining steps taken over the weekend just gone states: "The government has agreed with the banks supported by the recapitalisation scheme a range of commitments covering:
- maintaining...competitively-priced lending to homeowners and to small businesses at 2007 levels,
- support for...mortgage payments, and to support...financial capability initiatives,
- remuneration of senior executives...the government expexcts no cash bonuses to be paid to board members,
- the right for the government to agree with boards the appointment of new non-executive directors,
- dividend policy."
Practially, however, the outcome is that the government becomes a major if not the dominant shareholder in most of the UK's biggest banks because the private sector investors are simply not in a position to step in to buy a relative proportion of any additional shareholder equity placed on the market. Northern Rock is, of course, already fully nationalised.
Funds and fund managers are having a hard enough time ensuring redemptions are kept to a minimum on their institutional funds business, while retail funds data from the Investment Management Association (IMA) suggests it will be a hard task to pursuade retail investors of the need to pump more money into funds that are already massively down from last year - particularly in cases where the performance of the funds is highly correlated to the falls experienced by stock markets overall. Incidentally, the IMA itself stated last Wednesday that the government's plans would only really work if "the banks have accurately valued their assets".
Meanwhile those same HM Treasury sources today claimed that there is simply no idea when their new shares in UK banks - to be held in a new company yet to be fully set up - will actually be offloaded back into the market. Notwithstanding the long-term government policy of seeing the success of private sector banking, with markets in the state they are there is simply no forward visibility on the issue of just when the public sector involvement can be reduced.
Possibly more frightening for the pension funds and other investors reliant on FTSE yields, it is suggested that in light of the commercially driven offer of capital from the government, the new preference shares held by the government will see any payouts grabbed for use by the public purse before any talk of dividend payouts to ordinary shareholders resumes. Thus even when the government does move to reduce its holdings in the banks, it is not certain that this will commence with the preference shares, but could start with tranches of ordinary shares being sold back to the market. This would leave the dividend issue hanging over the share price at that point.
Additionally, as of this morning, the suggestion from HM Treasury is that banking as such is at heart a basic business of taking in deposits and offering loans, and that the current malaise is the direct result of institutions getting involved in "exotics", which led to a "period of irresponsibility".
But, what HM Treasury does not speak about officially or unofficially is the fact many investors have relied on these exotics to assist their own investment objectives. While it may be more a case of, for example, the need to meet particular long-dated liabilities, the fact is both the exotic instruments themselves as well as the profits derived from the manufacture, sale and subsequent repackaging and trading in such instruments has been a key to meeting the government's own desired policy of forcing millions of more UK long-term savers into a position of meeting their own retirement needs - effectively taking today's workers off the balance sheet of government business in the next 20-30 years.
Without the additional profitability such instruments have brought in the past few years, then the prospects of returning to the full-year profit levels announced in the past 12 months is pushed further into the distance. RBS, for example, said in its 2007 full year results published in February this year that its Global Banking and Markets division make £3.687bn in profit, while the UK Corporate Banking division make £1.961bn. Overall group profit excluding the ABN Amro acquisition was £10.298bn.
Without allowing certain levels of risk, or bets, to be taken, there is concern the other policy could be throttled, for example, and ironically in the area of pensions, by the undoing of moves to encourage ordinary savers into tax-efficient wrappers and instruments beyond cash deposits in building societies - still the mainstay and strong-point of the traditional mutual business model - and reliance on state pension.
There is some evidence that HM Treasury has at least thought through the consequences of its actions in the long-term in the response today from those same sources that there "will be no revisiting of the CSR [comprehensive spending review]".
There are still questions, though, about just how the details published today will actually help on the ground.
HM Treasury today stated that its objective in investing in RBS, HBOS and Lloyds would be to push their Tier 1 capital ratio above 9% "well above international minimum standards and at a level that should put them on a strong footing for the future." But. in an immdiate watering down of the effect of this statement, Barclays, which is yet to tap taxpayer funds in the same way, has stated it capital raising exercise objective will increase its Tier 1 capital by some £6.5bn, which "would result in a pro-forma Tier 1 capital ratio as at 30 June 2008 of over 11%"
The question then stands: if Barclays deems it necessary for a ratio of 11%, then why does HM Treasury suggest an unspecified ratio "in excess of 9%" should suffice? Interestingly, as of 1.45PM on Monday 13 October, the share price of HBOS was down more than 22%, RBS down more than 10% and Lloyds down close to 9%.
RBS' share price was trading below the 65.5p per share price agreed with the government as underwriter of the £15bn offer for ordinary shares to raise Tier 1 capital - and which has resulted in the ousting of chief executive Fred Goodwin and chairman Tom McKillop. RBS shareholders also lose out by way of the £5bn in preference shares subscribed to by HM Treasury.
Barclays was up more than 6%, HSBC up almost 7.5% and Standard Chartered up almost 11.5% at the same time. Clearly there remains the danger of the government being pushed to 'plan D' whatever that may be.
Further evidence of that danger lies in the lack of change in the interbank lending rate. According to the British Bankers Association Sterling 3-month LIBOR rate, today's 11AM fix remained stubbornly high at 6.26875%, barely changed from Friday's fix of 6.285%.
The overnight Sterling rate did better, dropping to 5.6% from 5.8125%, the previously recorded overnight rate.
By way of contrast, the 3-month Sterling BBA LIBOR rate stood at 6.28% a year ago. On 13 October 2006 it was 5.11750% and on
13 October 2005 it was 4.57313%.
The LIBOR rate will need to come down for the government's policy objectives to take effect, and ultimately give investors in UK Equity Income funds - and other sectors - some hope that returns will trough before heading for improvement by at least sometime next year.