Emma Wall: Hello and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined by Jake Robbins, Manager of the Premier Global Alpha Growth Fund.
Hi, Jake.
Jake Robbins: Good morning.
Wall: So, you started the year with quite a lot of cash. Perhaps you could start by saying why you made that decision to hold a cash buffer in the fund.
Robbins: Certainly, yes. So, we were running 6%, 7% of cash at the start of the year. The main reason really was that after five or six years of bull market we believed that valuations whilst not extremely expensive have become less attractive. We were also concerned that growth expectations, particularly around the Eurozone and to a lesser extent Southeast Asia, were still far too optimistic. So, the combination of unattractive valuations and overoptimistic estimations really led us to hold more cash.
Wall: Of course, you saw the global market crash coming, you could say.
Robbins: I wish. I mean, for some time we've been underweight oil and mining stocks, any kind of industrials that are exposed to global growth just because we thought again that expectations were too high, valuations weren't attractive enough and the prospects were quite dim. Where we have been finding some value in the market, however, is some of the financials and so particularly in the U.S. – it seems a long time ago now, but of course, U.S. interest rates actually began to rise in December.
And given the U.S. economy seems relatively robust and notwithstanding the past few weeks, wages in real terms seemed to be rising, we think the outlook actually for the U.S. economy is fine and we think the U.S. financials are actually quite an attractive way of playing that.
Wall: Now you have stipulated there the U.S. financials because of course some of the European financials, especially in the last couple of weeks, have been really hit hard. We've had some accusations that actually their balance sheets are up to scratch and so the stocks have fallen taking European markets with them. Is it then just the U.S. sort of banks that you feel are a good place to deploy this cash?
Robbins: Well, I certainly think the U.S. financials are better capitalized than their European peers. So, in 2009, the U.S. government forced a lot of capital into these banks because the U.S. economy has recovered far more strongly than Europe and the operating environments being better and actually profitability in the U.S. despite low interest rates is actually pretty good. So, from a fundamental point of view, it's a far more attractive place to invest.
Now, the concerns about European banks as a whole we think are unwarranted. Most European banks are far better capitalized than they used to be and have de-risked their balance sheets quite successfully. There are pockets, however, where you would continue to be concerned. Deutsche Bank remains overleveraged and tends to have a lower-quality loan book and they are also insisting on trying to expand their investment banking business which in this day and age is actually quite a low-return business.
So, Deutsche itself has issues. The Italian banks have extremely high nonperforming loans and the Italian economy is not a particularly great economy even in the best of times. So, they will struggle to grow their way out of trouble. So, I would avoid those areas. But if you look at some of the French banks, for instance, they have been sold off extremely heavily as well, but they look to be a lot better and stronger fundamentally.
Wall: So, it's really about those banks that chose to take action when the credit crisis, the global recession hit and have got their book in order and perhaps are not so exposed to these bad loans and indeed to emerging markets.
Robbins: Yes, I think so. So, if you look at valuations now, most banks are priced as if we're entering a 2008-2009 scenario or Eurozone crisis of 2011. Now the difference now is most of them have far, far high levels of equities who act as a buffer against any future losses.
So, that wouldn't be our best case scenario. But if that kind of downside to the economy does transpire, these banks should be able to go through that without the trauma that we've seen in the past. However, valuations are suggesting that they will have to be recapitalized which we think is unfair and gives you a very good investment opportunity.
Wall: Jake, thank you very much.
Robbins: Pleasure.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
