Some 13 funds in the IA UK All Companies sector hold Royal Bank of Scotland – which recently announced losses of close to £1bn – as a top 10 weighting in their portfolios, according to data from FE Analytics.
The firm, which received a multi-billion pound bailout during 2008’s financial crisis, announced last Friday that it made a loss of £968m during the first quarter of this year, which is more than double its loss this time last year.
The results have put RBS in the firing line, with stock falling on the back of the news and analysts rounding on the bank with one analyst calling it “a complete mess”.
Large-cap banks have certainly divided investors’ opinions over recent months. While some think that they are attractive value plays in an environment of toppy valuations, others believe they are simply too high risk to hold at the moment.
FE Alpha Manager Margaret Lawson, who runs the SVM UK Growth fund, told FE Trustnet earlier this week that many of the firms in the sector are saddled with debts that are too large for them to clear.
“Although financials look cheap relative to other cyclicals – they’re down about 36 per cent relatively – when you look at absolute values they’re not a bargain. It’s for the same reason that it has been over the past five years, they have too much debt,” she explained.
RBS’s latest results – which the firm attributes to a hefty dividend payment made to the UK government – perhaps bolster this argument. Since the start of the year the stock has underperformed the FTSE 100 by 22.34 percentage points with a loss of 23.84 per cent and has provided a loss of 93.51 per cent since the year of the financial crisis. Since the profit loss was announced, the stock has made a loss of 8.7 per cent compared to the FTSE 100's loss of 0.58 per cent.
Performance of stock vs index since 2008
Source: FE Analytics
Seeing as the stock has now underperformed for such a long period of time, should investors see these latest results as a buying opportunity or should they avoid the stock altogether?
“RBS is just a complete mess,” Joe Rundle, head of trading at ETX Capital, said. “Having been bailed out, being largely owned by the government is now a burden – the company would be best served by being returned to private ownership as soon as possible.”
“Taxpayers would take a hit but it simply can’t keep posting losses forever. Something has to change and the government might be best served to accept a loss on the price it paid in return for a healthy and sustainable RBS.”
Graham Spooner from The Share Centre says that the bank’s losses have widened significantly as it continues to battle with inherited challenges.
“The group is shifting its business towards retail and commercial banking, and the CEO’s restructuring plans will shrink the group further through to 2020,” he said. 
“The share price has continued to fall over the last 12 months and is now close to a three-year low. We suggest still avoiding the stock as there are better opportunities to be had in the market.”
Out of 268 funds in the IA UK All Companies sector, only 13 of them currently hold the stock as a top 10 weighting. Three of these – Schroder Income, Schroder Recovery and Schroder Specialist Value UK Equity – are headed up by management duo Nick Kirrage (pictured) and Kevin Murphy.
The managers hold in excess of 4.8 per cent in each fund and also hold the likes of HSBC and Barclays across their portfolios.
Kirrage and Murphy look for stocks trading on low valuations compared to their long-term averages and will often position themselves aggressively during down markets as they see volatility as yielding opportunities.
This style clearly works in their favour as the managers have comfortably outperformed their peer group composite over the longer term, achieving an average total return of 55.42 per cent over five years compared to the composite’s return of 34.47 per cent. A focus on value stocks means they are lagging over more recent time frames, however.
Performance of managers vs composite over 5yrs
Source: FE Analytics
However, it has meant that the funds may not be suitable for the faint-hearted – all three funds have above-average annualised volatility over the same time frame while Schroder Income and Schroder Recovery have above-average maximum drawdowns, which measures the most money lost if bought and sold at the worst possible times.
Another popular fund that holds RBS in its top 10 list is Jupiter UK Growth, which has been headed up by Steve Davies since 2013. This is another fund that holds value stocks.
The manager, who holds a 4.62 per cent weighting to the stock in his fund, holds ‘recovery’ and ‘growth’ buckets and focuses on market areas that he views favourably, or individual companies whose profits have fallen but are expected to improve over time.
“Why the banks? The starting point is valuation – there’s not much left on the market that’s obviously cheap compared to history but with the banks that is definitely true,” he told FE Trustnet at the end of last year.
“They’re still unloved companies – a lot of people won’t touch them, so that’s a good start. From there, they’re fundamentally becoming better businesses.”
Over Davies’ tenure, the fund has delivered a top-quartile total return but, as with the aforementioned Schroder funds, it is perhaps better suited to investors with a higher risk appetite as it has a bottom quartile annualised volatility and downside risk.
The four crown-rated Majedie UK Focus fund also has a sizeable weighting in RBS at 3.88 per cent, making it the fifth-largest holding in its 63-stock portfolio.
The £602m fund is managed by James de Uphaugh, Chris Field, Matthew Smith and FE Alpha Manager Chris Reid. It is able to invest across the cap spectrum and, at the moment, it holds 52.4 per cent in FTSE 100 stocks, 21.6 per cent in mid-caps and 2.7 per cent in small-caps.
The fund has delivered a top-quartile performance over three, five and 10 years and has also achieved an above-average annualised volatility over these time frames.
Perhaps unsurprisingly, head of Investec’s value team Alastair Mundy holds 3.7 per cent of his UK Special Situations fund in RBS, making it the portfolio’s eighth-largest holding.
The manager is renowned for adopting a deep value approach when it comes to investing and, in an article published at the end of last year, he described banks as his “comfort blanket” in an otherwise challenge value environment.
“The reason I hold banks can be explained through Bellway in June 2008, when Robert Peston was telling everyone it was the end of the world and that we were all going to hell in a handbasket,” he said.
“That was exactly the point we should have been buying housebuilders, not because from that point on housebuilders’ operating conditions drastically improved, but because housebuilders had taken so much punishment by then they just couldn’t take any more in share price terms.”
“When the market actually bottomed between February and March 2009, it had already outperformed extraordinarily from its lows.”
Other funds that have RBS in their list of top 10 holdings include GAM UK Diversified, City Financial Absolute Equity and Russell UK Growth Assets.
Table of UK growth funds with RBS in top 10 holdings
Source: FE Analytics
