An increased number of UK investors are ditching funds with high exposure to financial sector stocks - as poor performance continues to hamper this sector.
Data from Morningstar Direct shows that nearly £300 million of assets were sold in funds under the financial services equity sector in the first quarter of this financial year - the highest level in five years. In the year to date the sector saw outflows of £590 million.
Within this sector, Aptus Global Financials fund saw the largest outflows, at £271 million in the first quarter of the year. Jupiter Financials Opportunities fund also recorded outflows of £18 million over the same period of time.
Sell-off Extends to European Funds
Investors also sold high volumes of European funds that have a high exposure to financial stocks.
This includes Standard Life European Equity Income, a Bronze Rated fund with 30% exposure to financial services stocks. The fund gained 0.7% from the start of the year till end of May; however it recorded more than £1.4 billion outflows in the year to date.
The fund had delivered positive returns over the past four years. It remains a good offering, despite changes to the European team, according to Morningstar analyst Daniel Vaughan.
He said the fund manager - Will James – is looking to both a sustainable yield, that is higher than that of the market, some capital growth over time. As a result returns may lag a strongly rising market but should be more resilient in downturns.
During his tenure, James has been able to generate a return just behind the peer group average, but ahead of the fund’s benchmark - while growing the dividend. The ongoing charge is around the average at 1.60%.
Another Bronze Rated fund, Neptune European Opportunities - which has up to 34% exposure to financial stocks - also saw outflows of £149 million year to date.
Rob Burnett, the fund manager, has delivered strong returns on this fund since he took the helm in May 2005, albeit with some bumpiness along the way, according to Morningstar analyst Muna Abu-Habsa.
Each manager and analyst in this fund is responsible for researching a global industry sector, with senior analysts also running model sector portfolios. This allow managers to gauge the level of conviction in individual stocks and also promote deep domain knowledge and accountability. Burnett, for example, covers financials on a global basis.
Morningstar analysts continue to think very well of Burnett, and expect investors to benefit from his move to limit short-term trading and make better use of the risk-management tools at his disposal.
Can European Banking Stocks Fall Further?
It is perhaps not surprising we have seen such a big increase in these outflows, as many are expecting that financial stocks in the European region will continue to underperform in 2016.
There had been hopes that the European Central Bank would provide further support measures for the financial sector. But Alex Lee, European Equities fund manager at Canada Life Investments said that “these hopes have failed to materialise”.
While more capital was raised, it contributed nothing for earnings, but instead service to increase safety buffers.
“Earnings have continued to struggle on the back of high loan loss provisions, weak interest income, as well as additional costs related to the ever greater burden of regulation and compliance,” Lee said, “Given the cloudy outlook, with still weak earnings and rising capital requirements, it is understandable banks have underperformed and remain cheap.”
Banking valuations in Europe still look cheap, particularly when compared to historical average. While many are expecting a bumpy ride ahead, if US inflation continues to tick up – and get back to normal levels – and this trend is repeated in Europe, financial stocks could be significant beneficiaries, according to James Sym, European equities fund manager at Schroders. He said companies in both the banking and insurance sectors should benefit.
“Bank share prices in particular have come under heavy downward pressures, and an end to increasingly negative interest rates would be crucial for their performance. If banks were to return to their mean average discount to the wider market, this would imply 50% outperformance from current levels,” Sym said.
