Citywire AAA-rated Ken Hsia has moved his fund to an overweight in banks for the first time in three years to capitalise on vast improvements in the sector, the European equity specialist has said.
Speaking at an investor conference, Hsia, who runs the Investec GSF European Equity fund, said he had increased his holdings in the French Banks BNP Paribas and Société Générale over the past month.
‘For the first time in three or three and a half years I am actually overweight banks. We had been put off by the low returns they have been achieving and low but improving capital ratios. BNP Paribas and SocGen have started screening well through the course of this year,’ he said.
‘The improvement in terms of revenue growth is actually across the board. In terms of demand from corporates and consumers to investment banking and other advisory services, they are actually lifting in a pretty broad way. The provision level is falling so we are getting better than expected results given the geared nature of these businesses.'
Hsia’s opinion differs to those of his colleagues, such as those who manage the Investec GSF Global Equities fund. James Hand, who runs the fund with Citywire + rated Mark Breedon, prefers to hold insurance companies rather than banks, which makes up the bulk of the fund's 23.5% allocation to financials.
‘A lot of our investing over the last few years has been in the insurance sector rather than the banking sector. Here you see strong balance sheets good returns on capital and some fairly sensible M&A,’ Hand said.
Citywire + rated Clyde Rossouw, who manages the Investec GSF Global Franchise fund agrees with Hand and owns no banks. Financials make up 6.2% of the fund and he has a 5.2% holding in the ratings agency Moody’s Corporation.
‘We’ve allocated more weight to financials, not the banks. We think that there are better financial companies to invest in that have better cash flows,’ Rossouw said.
‘We own Moody’s, we have owned them for a number of years what we like about the business is that it is benefitting from disintermediation and continued growth from bear markets.'
'As companies roll over their debt, those issues need to be rated by law, if you don’t pay for the rating you don’t get a lower cost of capital.'
‘Some people say it’s a reverse incentive but we quite like quite like the mechanics where a company can reduce the cost of capital in exchange for a decent rating and investors buy those issues.’
The Investec GSF European Equity fund has returned 69.75% in euro terms over the three years to the end of August 2015. This compares to a rise of 41.38% by its Citywire-assigned benchmark, the FTSE World Europe TR EUR, over the same period.