Three Super 60 fund managers give their take on banking turmoil

Morningstar reviews the exposure to banks of funds on the interactive investor Super 60 investment ideas list and speaks to some of the managers.

A lot has been written in the past few weeks about the collapse of Silicon Valley Bank (SVB) and whether this signals a repeat of the 2008 banking crisis.

It’s fair to say that the situation at SVB was very different to the scenario we faced in 2008, nevertheless we have seen signs of a panic emerging in markets and investors becoming very jittery.

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We took this opportunity to review the exposure to banks of funds on the interactive investor Super 60 and ACE 40 lists and to speak to some of the managers about their exposure and their views on the market.

Guinness Asian Equity Income

Topping the list with an allocation of around 19% to banks is the Guinness Asian Equity Income fund.

The fund has been managed by Edmund Harris and Mark Hammonds since its launch in December 2013 and is designed to provide investors with exposure to Asian equities through a high conviction, low turnover portfolio of consistently profitable dividend-paying companies.

Around half the fund’s exposure to banks is to Chinese banks, including two state-owned banks and one non-state owned, all of which are in the managers' opinion trading on attractive valuations with strong risk/reward opportunities.

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With regard to the recent sell-off, the managers believe that from an Asian perspective this was viewed as a US and European problem and any share price falls were done largely in sympathy.

The managers also note that in Asia, rising interest rates have not resulted in yield curve inversion and the conditions for rapid shifts in deposits are not present. Furthermore, Asian banks are being more tightly supervised than US regional banks have been, post Dodd-Frank. China, in particular, has been centralising and intensifying its small bank supervision since the collapse of Baoshan Bank in Inner Mongolia, the first collapse in decades.

The region is looking towards accelerating growth in 2023 compared to the developed markets. There are no signs of significant deterioration in credit quality and in China’s case, improving economic conditions should lead to improving credit quality. Liquidity remains ample and valuations attractive.

Artemis SmartGarp Global Equity fund

Following closely behind with an allocation of around 18% to banks is the Artemis SmartGARP Global Equity fund. This fund is managed by Peter Saacke and Raheel Altaf and adopts an investment process that has been developed and refined over 28 years and is tried and tested at Artemis for more than 20 years. The managers adopt a quantitative investment process that tracks company fundamentals and investors’ behavioural trends while also applying a strict valuation discipline. In essence their aim is to invest in undervalued companies with improving fundamentals.

Thinking specifically about the fund’s exposure to banks, the overweight predominantly arises as a consequence of the managers' exposure to emerging market banks and, in particular, Chinese banks where the investment case is centred around deeply depressed valuations, palpable adverse investor sentiment coupled with supportive monetary and fiscal policy. Reasons, which are largely echoed by the managers of the Guinness Asian Equity Income fund.

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In the aftermath of the failure of SVB et al, the managers' response has been to gradually shift exposure from smaller to larger banks and to cut their exposure to Canadian and Australian banks. Of special note is their investment in UBS (SIX:UBSG) in the immediate aftermath of the news of the takeover of Credit Suisse. UBS was already scoring well on their SmartGARP quantitative tool before the deal and, in their opinion, the terms of the deal were very favourable to UBS.

Their overall exposure to banks is little changed and at +10% compared to benchmark, the fund retains one of its biggest banks overweights in the almost 20 years that manager Peter Saacke has been managing the fund. In their opinion, the risk/reward in banks generally, and emerging market banks in particular remains excellent and at present they are more concerned about the adverse real economic effects of the latest stresses in the financial sector than the investment cases of the individual banks they invest in. Accordingly, the fund remains defensively positioned with a notable bias towards lower-risk stocks which, as an additional layer of protection, trade on well below market valuations (fund price-earnings ratio of 7.7x versus benchmark’s 15.2x).

Man GLG Income fund

The final fund we reviewed is the Man GLG Income fund, which has around a 16% allocation to banks.

Henry Dixon has managed the fund since inception in November 2013 when he joined Man GLG and is supported by co-manager Jack Barrat and two further analysts. This strategy targets three types of stock: those that are cash generative and trading below their estimate of the company's asset value; those where the company's profit stream is being undervalued relative to the cost of capital and there is positive earnings momentum; and for this income mandate the team also targets companies with net cash balance sheets and strong free cash flows, which can lead to positive dividend surprises.

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Looking ahead the managers point out that banks continue to trade at attractive valuations, with loan growth that has remained very low and deposits that far exceed loans and this coupled with a significant improvement in their capital ratios continue to make these stocks very attractive.

It is interesting to observe that the funds that have above average allocations to banks are diversified in terms of their country exposure, but are united in their focus on identifying stocks that are trading at a discount to their long-term valuation opportunity. Thereby suggesting that the opportunities are widespread and that despite the significant gains we saw in financials in recent years, these stocks potentially remain cheap.

Ruli Viljoen is head of manager selection, Morningstar Investment Management Europe.