Hickmore, who manages five funds at the group including SWIP Strategic Bond and SWIP Sterling Credit Advantage, believes many of the reasons analysts give for steering clear of the sector’s equities are exactly the same reasons why fixed interest investors should take the plunge. “It’s an interesting one because debt holders are going through a very different experience to equity holders,” he said.
“I think with regard to equities it’s really difficult to get excited about banks, as if you are shrinking your balance sheet, your return on equities is going to struggle to some degree.”
“But from a debt-holder’s perspective, if you shrink your balance sheet, then great.”
“The market prices banks as high risk at the moment but there are gaps in that analysis that leave a few options we can work with.”
While the manager is selective about what areas of the market he invests in – he likes UK and US banks as well as some French ones, but avoids Germany – he says that barring an all-out collapse in the western world’s financial system, it is natural to assume that yields on bank debt will eventually fall.
“On a very long-term view, banks should trade more expensively than corporates,” he continued.
“It makes no sense to me why a bank can trade wider than its clients. In very simplistic terms, if they are having to borrow at a higher rate, it’s not sensible.”
“Over a very long-term view, as long as they survive, there’s enormous value in banks, but it’s watching out for the volatility.”
Hickmore’s views on financials echo those of Invesco Perpetual’s Paul Causer and Paul Read, who currently have a 51.69 per cent weighting to the sector in their Tactical Bond fund.
In November last year, Read told FE Trustnet that the risk priced into the sector failed to take into account the enormous deleveraging it had undergone since 2008 and 2009, nor the massive improvement in loan-to-deposit ratios.
Aside from financials, another area Hickmore is keen on is emerging market debt.
“I think if you get a big drop-off in growth in Europe, that’s going to affect everybody in the short-term whether it’s emerging market or non-emerging market,” he said.
“But the roll-out of urbanisation in China and the industrialisation of Latin America and India are good long-term trends and it’s about trying to find the opportunities to play on them.”
Rather than investing directly in emerging market sovereign debt, Hickmore prefers the bonds of companies focused on these areas but that are based in countries SWIP has in-depth knowledge of. He cited America Movil as a good example of this.
“This is Carlos Slim’s mobile phone company in Mexico,” he said.
“It is a huge, huge business in Latin America, but bearing in mind that’s their major market, having an exposure to it in sterling or euros has worked really, really well, and the performance of those bonds has been great.”
“And again there’s great information on Mexico, we get all the coverage from the equity analysts we have based there.”
Performance of manager vs peer group over 10-yrs
Source: FE Analytics
According to data from FE Analytics, Hickmore has returned 62.86 per cent to investors over the past 10 years, compared with 82.73 per cent from his peer group composite.