The destruction of value in the sector since June of last year is truly staggering. From its trough in February 2003 to its peak in May 2007 when it touched its peak, the MSCI World Financials index returned 18.08% per year annualised. However, from 1 June through 28 February, the index has plunged a full 21.8%.
The capitulation financials stocks have undergone in the short-term is also reflected in the per
formance of the Morningstar Sector Equity Financial Services category, home to 109 funds, of which 24 are available for sale in the UK. Over the last three and six months as well as the year to 31 January, the broad peer group is down 13.2%, 11.9% and 13.5%, respectively, in Sterling terms. From the MSCI index's peak at the end of May 2007, the average fund in this category has lost 17%.
But, as expected, not all funds in the Morningstar category have experienced the same degree of deterioration. Jupiter Financial Opportunities has done relatively well over the very short term - one, three, and six months as well as one year. Two bottom quartile funds over the last six months are - Axa Framlington Financial and JPM Global Financials. There were two clear performance trends regarding the sell-off--first, exposure to the US hurt - funds in the bottom quartile during the periods had substantially more exposure to the US than those in the category's top quartile. Both the JPM and Axa funds had a much higher level of exposure to the US, which is the hardest hit in the current crisis, compared with Jupiter which ploughed very little of its capital in shores across the Atlantic. Asia ex Japan exposure, particularly to China, also was a big positive in the period--with all the FTSE Xinhua 600 financials indexes up north of 10% during the sell off. No financials funds in the UK invest heavily in the region, however, so it was not a large determinant of relative performance.
We think highly of the Jupiter offering. Apart from protecting capital in recent very volatile times, the Jupiter fund has also delivered strong performance over the long term. The fund ranks in the category's top quartile in nine out of the last 10 calendar years and is the category leader over the same period. It is also one of only handful of UK offerings across category lines to have the same manager - Philip Gibbs - running it for more than a decade. Gibbs' investment approach takes a macro view of the economy to identify themes offering the most potential. He looks for reasonably priced companies to play out his ideas and is willing to back strong convictions. He tends to invest in companies with strongly-incentivised and committed management.
There are at least three points worth mulling over if you are contemplating bargain hunting in this crisis-ridden sector. First, any fund focused on a narrow sector is inherently riskier than a broader offering, so keep that in mind before diving in. Those risks loom especially large in the financials group given the continued uncertainty in financial markets and the prospect of recession in the U.S. In short, financials may look cheap on past earnings, but they're cheap for a reason--future earnings may well be considerably lower. Second: Don't overdo it. UK investors are quite likely to have substantial financials exposure already. Financials represent nearly a fourth of the FTSE All Share ex Investment Trust index, and many UK equity funds will thus often have heavy exposure to the sector. Related to this point is the fact that financials funds can vary widely--if you are looking to add, make sure you are clear on the underlying industry and regional biases of the fund you select. You can find this information on the portfolio page of our fund reports here at Morningstar.co.uk (click here to see the page for Axa Framlington Financial).
