Not All Financial Stocks are Bad Banks says Finsbury's Nick Train

Scared off financial stocks by the badly behaved banks? Gold rated investor Nick Train of Finsbury Growth & Income trust picks companies which buck the trend

Emma Wall 9 August, 2016 | 12:34PM
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Financial stocks have taken a battering since Brexit. Investors concerned about what the UK leaving the European Union would mean for banking licenses and ease of global business pulled money from the big banks. On June 27 trading was suspended in Royal Bank of Scotland (RBS), Lloyds (LLOY) and Barclays (BARC) shares following dramatic 10% plus drops in their share prices.

RBS saw their share price drop by 15% in mid-day-trading – erasing gains made over the previous five years, to return to levels last seen in 2012.

Investors had been warned prior to the Brexit vote that banking stocks were at risk. Speaking at the beginning of June Edward Smith, Asset Allocation Strategist for Rathbones said: “Banks are one of our key sources of risk from Brexit and that's because of the direction of travel in European legislation and regulation.

“We've spoken to a number of lawyers and experts on the subject, the unanimous that the EU is going to make it harder and harder to do financial services business in Europe from outside of its borders.”

Banks Further Hit by Rate Cut

Then last week Mark Carney announced that the Bank of England Monetary Policy Committee had unanimously voted to cut interest rates to just 0.25% from 0.5%, lowering the record floor level of the past seven years. The move, alongside bond buying quantitative easing, aims to boost the UK economy by encouraging borrowing and in turn, consumer spending.

Bank Governor Carney said in a press conference after the announcement that the high street banks were duty bound to pass on the rate cut to customers.

“I think the MPC is very clear that it sees the effective bound for interest rates as a positive number,” he said. 

“Let me say this to the banks, the banks have no excuse with today's announcement not to pass on this cut in the bank rate. They should write to their customers and let them know that.”

This means less capital for banks – and while mortgage holders everywhere rejoiced, high street bank stocks sunk further; the former backbone of any income investor’s portfolio, financial stocks are having a torrid year.

Financial Stocks Which Buck the Trend

But while the big high street names battle ongoing PPI claims, the Brexit fallout and tumbling share prices some financial stocks may be worth a second look.

Nick Train, Gold Rated manager of the Finsbury Growth & Income Trust (FGT) likes business with a strong brand, multi-decade history, are cash generative and are family run. Consumer brands such as Diageo (DGE) and Unilever (ULVR) – his two biggest holdings – may more easily spring to mind, but Train also has financial stocks with large positions within the portfolio.

“We recently added to our Hargreaves Lansdown (HL.) position when the shares fell in the week after the Brexit vote,” said Train. “We first bought them at £2 years ago, but we added at £10.50. They have been a big contributor to shareholder returns over the years.”

He also highlights to Schroders (SDR) – founded in 1804, and Rathbones (RAT) – founded in 1783, as examples of financial stocks which uphold to his investment philosophy.

“There is a heritage and culture of quality in both companies that is integral to how we invest. To the extent is possible for asset managers to have a ‘brand’ they both do,” he said.

“Schroders in particular has a presence in every part of the world, as an investor and asset gatherer. It would be extremely difficult for a smaller company to replicate what they do. Rathbones has an aura of blue chip, quality reputation – that is valuable to us as investors. Plus, what matters to investors is that both companies have delivered dividend growth over decades.”

Train said that both companies ticked his checklist of very conservative balance sheets, cash rich and with family shareholders.

“Granted, any financial brand is not as valuable as say Guinness, but we are optimistic about equity markets so it makes sense to have strategic exposure to these types of businesses which act as a proxy for markets.”

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Barclays PLC209.80 GBX-2.33Rating
Diageo PLC3,703.00 GBX-0.82Rating
Finsbury Growth & Income Ord881.00 GBX-0.45Rating
Lloyds Banking Group PLC54.37 GBX-1.38Rating
NatWest Group PLC251.30 GBX-0.83Rating
Rathbone Brothers PLC1,948.00 GBX-1.02
Schroders PLC3,425.00 GBX-1.04Rating
Unilever PLC3,516.50 GBX-3.97Rating

About Author

Emma Wall  is former Senior International Editor for Morningstar