The best choices of financial stocks beyond the giants of the banking sector

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At the height of economic uncertainty and market volatility over the past year, the Bank of England’s Prudential Regulation Authority (PRA) has banned banks from paying dividends to ensure sufficient capital is detained to deal with potential losses.

In July, the PRA announced the immediate removal of these restrictions on dividend payments for the year 2020 for the sector. This was a slightly different tactic from that of the European Central Bank, which chose to maintain the restrictions until next month.

The latest Janus Henderson Dividend Index shows UK banks wasted no time embracing their new found freedom, contributing significantly to second quarter payments, which jumped 61% year-on-year.

HSBC was one of the biggest contributors, with Barclays, Lloyds and NatWest also reinstating dividends.

Dividend, obvious?

It is undoubtedly good news that the banks are starting to pay dividends again, as it shows confidence in the economic recovery of the Bank of England. It also demonstrates the strength of banks’ balance sheets compared to the aftermath of the global financial crisis. This should bode well for corporate and personal financing in the coming years.

But we believe there are other ways to play on the relative strength of financials. Apart from Barclays, which we believe to be underestimated given its proven ability as an investment bank and its more international focus, we do not own any UK bank.

While we don’t shy away from financials as a sector, we tend to look for companies that have a more diverse asset base and higher pricing power than the big banks.

Below are five financial companies that we own.

Close brothers

The fund recently celebrated its 21st anniversary and Close Brothers has been part of the portfolio since day one. We love it because it’s an old-fashioned merchant bank with a slightly different DNA. The basic banking part is not private financing but private financing for small regional businesses: supporting the cogs of the UK economy.

Historically, the company has been run very conservatively. We like this because it has been proven over several cycles that, rather than just increasing the loan portfolio, it will only do so when the pricing is right and the returns on offer are decent relative to the risk it is facing. take. Finally, he owns the broker Winterflood, which has been brilliantly successful in volatile markets over the past 18 months.

London Stock Exchange Group

We love companies involved in the asset management industry. We’ve owned Schroders, for example, for almost two decades, and we were in the top 10 more or less throughout that time.

In addition to the asset managers themselves, there are those who provide ancillary services such as LSEG. We added it to our portfolio last year after it sold out due to Brexit and acquisition concerns.

Its entry barriers are very high, since it holds around 99% of the market share in some of its stock exchange and clearing house activities. It is not just a matter of the stock market, and the market seems to forget this periodically.

The recent acquisition of Refinitiv further diversifies LSEG and so far the integration is on schedule and under budget. We believe stocks are positioned to revalue as integration risk declines in the coming quarters.

Hargreaves Lansdown and IntegraFin

Another service area of ​​the asset management industry is platform companies that are both capital-tight and cash-free.

Hargreaves Lansdown is probably the best known in the retail investor space and has benefited greatly from increased interest in self-directed investing.

HL enjoyed record inflows in 2020 and is well positioned to capitalize on this success, by encouraging these new users to use the HL platform for their long-term savings and retirement.

Meanwhile, IntegraFin, owner of Transact, is used by more than 6,000 financial advisers who manage more than £ 41 billion in client funds.

It is a purely commercial platform, providing top notch customer service to its UK advisor clients. Customer loyalty is high and income is excellent.

Barclays

We have owned Barclays for some time now on the basis that it is unique among the big banks because of its activities in the capital markets.

This proved to be beneficial last year by providing countercyclical ballast as the consumption side of the business was under threat.

Barclays’ price-to-book (P / B) ratio relative to similar US banks is another reason we think it is attractive. It is currently around 0.54x P / B compared to JP Morgan’s 1.83x P / B.

They are not entirely comparable companies, but this is a significant difference in our opinion. We strengthened our position in Barclays in March and June of last year when financials were no longer popular and subsequently benefited from the recovery in value. We pruned at the end of last year.

Bet on it?

If interest rates rise, all banks will have upside potential. For this reason, it’s good to have a bank or two in your portfolio if you think inflation might outlast the current “transitional” effect discussed by central banks.

Bond market yields peaked at the start of the year and are falling despite rising short-term inflation.

The US 10-year is around 135bp, the UK 10-year gilt at 61bp and the German 10-year bund is decidedly negative. With central banks still the dominant buyer in fixed rate markets, there are few real price discoveries and countless economists have been baffled that bond yields no longer follow traditional inflation measures.

Compared to the index, we are underweight banks, but we have a lot of other financial stocks, which leads us to have the same overall level in financial stocks as the index.

Typically, we seek to invest in companies with unique characteristics that set them apart from their competition. In comparison, the big banks are under intense price pressure, as there is little that differentiates them from one another.

Old Citywire Wealth Manager Top 30 Under 30 Star Fred Mahon heads the SVS Church House UK Equity Growth fund alongside Rory Campbell-Lamerton and James Mahon, rated AA by Citywire. Over three years, the fund achieved a return of 19%, compared to an average return of 11.7% for its peers.




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