Is it Time to Take Gains from Financial Stocks?

Jupiter Growth & Income fund manager Alastair Gunn has 25% of his portfolio in financial stocks - and says the sector has a long way to go to make up Brexit losses

Emma Wall 15 March, 2017 | 10:30AM
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Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined by Alastair Gunn, Manager of the Jupiter Growth & Income Fund.

Hi, Alastair.

Alastair Gunn: Hello.

Wall: So, we're going to talk today about valuations partly because you have a value bias in your investing style and partly because it's a hot topic. I mean, the market has come up so much over the last year, thanks in part to depreciating currency. And one of the sectors that has done very well over the last six months is financial services. And you have sort of 20% of the portfolio in financial services. At what point do you say I'm going to take those gains and run?

Gunn: It's a good question. I would say that for me part of my exposure in financials is being to U.K. domestic financials and those companies got beaten up quite badly on the whole Brexit vote. And so, many of them are retracing the ground that they lost on the back of that decision and I think they still look pretty good value generally.

I have a high – a large bias towards insurance in my portfolios and one of the reasons for that is that those companies generally have provided pretty high returns over the last decade and that looks like is going to continue and they have the discipline to continue growing their dividends at quite healthy levels.

And all the while they are delivering the kind of income that I'm expecting coming off quite sensible valuations, I'm pretty reluctant to dispose of those. And to some extent it's about what are the alternative opportunities and I think the picture there is quite mixed at the moment.

Wall: Do you also have to take into consideration the market outlook itself because in a different part of the cycle perhaps you would be more willing to crystalise gains, but actually if the market is going to continue to run, there is no point in doing it just yet?

Gunn: Yes. I mean, it would be lovely to just think about economic cycles at the moment, but there are lots of other things that are influencing our thinking. So, it's kind of the U.K. cycle and Brexit impinges on that to some extent, it's the global cycle and where are we particularly in relation to the U.S. and perhaps a tightening economic policy there. And there are issues around politics as well.

So, there are lots of sort of top-down issues that we are facing and I think that pushes you ultimately to look at stocks much more on a kind of individual basis but still having some kind of radar out there to try and understand those bigger risks.

Wall: Now, the fund is called Growth & Income. We've talked about value, which obviously plays into the growth part of the mandate. With income, there's been a lot of talk about bond proxies of late and the fact that the places you can find income seemingly are becoming narrower and narrower. How much does that impact your investment philosophy?

Gunn: Again, it has had an influence over the last few years. I think we probably started trying to find overseas opportunities maybe three years ago now because we were worried about concentration risk around those big dividend payers in the U.K., lots of them with quite weak-looking balance sheets and very mixed outlooks in terms of earnings.

But I do think that sort of again Brexit has kind of thrown up opportunities to some of those things that were looking fairly fully valued have become more interesting and at the same time, a lot of those bond proxies, the kind of businesses that were compounding at a fairly steady rate and people felt were very dependable.

When you start to see potentially a bit more inflation, a bit more growth across the world and a bit less tension in markets, people are actually more willing to take profits in those stocks and particularly, if we're going to see bond yields starting to tick up, then I do think that those companies really do have to deliver in terms of growth. And interestingly, some of them are actually starting to show signs that the underlying growth is weakening.

Wall: Alastair, thank you very much.

Gunn: Thank you.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

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Emma Wall  is former Senior International Editor for Morningstar