US fund managers trim bank stocks

  • Wall St Week Ahead

Sep 2, 2018-

US-based mutual fund managers worried about the outlook for bank earnings have been trimming financial stocks from their portfolios, although some value-oriented portfolio managers and analysts said they still see attractive opportunities in the sector.

The average US based mutual fund reduced its stake in financial companies by nearly 1.1 percentage points in the second quarter to approximately 14 percent, the largest one-quarter decline since at least 2013, according to Goldman Sachs.

The move away from banks, insurance companies, and mortgage lenders came as the financial sector has underperformed the broad S&P 500 benchmark index by more than 5 percent since April.

Many fund managers believe banks have already hit peak earnings. One red flag is that the US Treasury yield curve has been flattening as short-term yields rise in anticipation of US interest rate hikes from the Federal Reserve while long-term yields fall on worries about economic growth and trade tensions. This situation generally squeezes bank profits.

Some investors worry long-term yields might eventually dip below short-term yields. Such a yield curve inversion that can signal a looming recession.

“The flatter the yield curve the harder it is to make money,” said Ian McDonald, co-leader of the financials research team at Janus Henderson Investors, which oversees $370.1 billion in assets under management, adding that “funds are looking around and saying that if we’re going to see weaker growth then we need to get out of financials.”

The spread between the yield of two- and 10-year US Treasuries is trading around its flattest in 11 years. Rising short-term rates raise a bank’s borrowing costs, while falling long-term rates limit how much they can charge for loans.

Yet McDonald said large-cap banks like JPMorgan Chase and Co , Bank of America Corp, and Citigroup Inc remain attractive even if the sector overall does not. The major banks have been investing in online platforms and mobile apps, making them more appealing to millennials and less dependent on costly branches, he noted.

“The US retail banking industry is moving from the post-crisis phase of risk management to the fintech phase of managing customer experience,” he said.

Ben Kirby, portfolio manager of the $15.4 billion Thornburg Investment Income Builder fund, said his fund has been moving more into European banks such as ING Groep NV, prompted in part by a recent sell-off in shares following the steep decline of the Turkish lira. The Turkish currency has plunged more than 40 percent this year due to increasing tensions with the United States and concerns that the country’s central bank is losing its independence under President Tayyip Erdogan.

“The US has been the market darling for the last 10 years, and that’s led to valuations that are a bit more stretched and an economic cycle that is a bit more mature,” Kirby said. “Whereas in Europe it’s earlier in the cycle and growth is accelerating more.”

Published: 02-09-2018 07:56

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