Star equity income fund manager Neil Woodford has sold his holding in HSBC (HSBA). The bank was not in his top 10 holdings for the Woodford Equity Income fund, but was an important investment as Woodford had not bought banking shares for more than a decade when he invested in HSBC early last summer.
Woodford bought HSBC for the mandate he ran for St James’ Place in May 2013, before also purchasing the bank for his own Equity Income fund at launch in June this year.
In a blog posted this morning, Woodford said that the decision not to own UK banks in the interim was fuelled by concerns about the quality of loan books, capital adequacy and high leverage ratios.
But conviction about HSBC’s assets led Woodford to back the bank, saying that HSBC is a “very different beast. It is a conservatively-managed, well-capitalised business with a good spread of international assets”.
Woodford also praised chief executive Stuart Gulliver and said the bank was trading at an attractive valuation.
Why the Change of Heart?
“In recent weeks, however, I have started to become more concerned about one particular risk: that of ‘fine inflation’ in the banking industry,” Woodford admits.
“Clearly, banks have attracted many fines in the post-financial crisis world as regulators and policy-makers have cracked down on past and ongoing wrongdoings in the industry. The size of the fines, however, appears to be increasing.”
He highlights the Bank of America $16.7 billion fine settled last month for selling toxic mortgages, comparing it to the 2012 fine HSBC had to pay for failing to prevent Mexican drug cartels laundering money through its bank accounts.
“Clearly, in both instances, these are wrongdoings which would be expected to incur a substantial fine. I am concerned, however, that these fines are increasingly being sized on a bank’s ability to pay, rather than on the extent of the transgression,” Woodford concludes.
This reactionary decision seems at odds with his previous buy-and-hold style when running funds for Invesco Perpetual over the past two decades.
Before the launch of the fund in June, Woodford said that “Woodford Funds as a company will be a very different offering – but expect business as usual when it comes to stock selection and the running of the new income fund.”
Indeed there were few surprises when Woodford revealed his full portfolio in July, with old favourites healthcare and tobacco stocks making up the bulk of the fund.
What do the Analysts Say?
Morningstar equity analyst Erin Davis says that she sees much to admire about HSBC, and praised the reorganisation, which begun in 2011; refocusing the bank’s ability to provide global financial services to corporate customers and its footprint in fast-growing markets. Davis recognises the risks of having revenue exposure to every economy in the world, but is confident in the management’s ability to mitigate these risks.
Morningstar analysts currently deem the bank to be fairly valued.
