By STEPHEN MARRIOTT 15/09/2008
Unsurprisingly some of the best performing funds in the UK All Companies sector during the last twelve months (to 31/8/08) have been those that have been the right side of the only profitable trade in town - differentiating between the merits of resource stocks and financials. Specifically that means being overweight Oil & Gas / Mining and underweight Banks. For example, Manek UK Growth and Liontrust First Growth are among a small group of funds to have actually produced positive returns, and both have a high position in Resources - 30% (31/6/08) and 43% (31/7/08) respectively - and little exposure to Financials. Meanwhile one of the worst performing funds, New Star UK Growth, has 34% of its portfolio invested in Financials and only 6% in Oil & Gas (31/7/08).
Generally most fund managers we’ve met recently are still cautious towards financials, citing that even though we’ve probably seen the worse of the losses related to the sub-prime crisis, banks will next suffer from bad debt write offs as a result of slowing economies. Only a few managers are currently making the call to sell resources for financials, though one of these is Fidelity’s legendary investor, Anthony Bolton. Back in June of this year he stated that he felt the time was right to start investing in banks and that the case for commodities was dwindling.
Although a dearth of good news continues to surround the banks, in recent months they have been making a comeback relative to resources, and during the last couple of weeks the Oil & Gas sector has fallen with the oil price, which now stands at around $100. The chart below shows that since Bastille Day (14th July 2008) bank shares have rallied by 20% and oil stocks have fallen by 6%. The gains in banks may be explained by some investors being prepared to look through the bad news and focus on value. For example on average Banks trade on a price to book ratio of around 1x (Merrill Lynch) and a P/E ratio of 10.8x (FT) compared to Oil Equipment and Services, which trade on a P/E of 21 (FT), and thus look relatively expensive. Of course bank profits could further deteriorate, Lehman Brothers may not be the last investment bank to fail and oil service companies’ profits could continue to increase, which would close this relative valuation gap.
Nobody has a crystal ball but the turnaround in sentiment towards banks since July is a reminder that the stockmarket performs a discounting function and when bad news is at its height this can often be the time to start investing. Just as it makes sense to diversify ones portfolio across different markets one should also follow a balanced approach to sectors - being too underweight or overweight a sector can be a dangerous game. Interestingly since Bastille Day New Star UK Growth is sixth best performing fund of 324 funds in the UK All Companies sector.
Fund performance data is sourced from Lipper Hindsight 15/9/08
