Financials with flexibility

Many investors have made fortunes by picking up heavily undervalued shares at times of market weakness, and with many fund managers such as Invesco Perpetual's Neil Woodford avoiding banking stocks, those with an appetite for risk might be tempted by the financials sector.

The financials sector dominates global equity indices, making up just over 25 per cent of the FTSE World Index alone, and is home to a diverse range of businesses such as property companies and stockbrokers. Although financial stocks continue to fight a number of headwinds, Philip Gibbs, fund manager of Jupiter Financial Opportunities believes that the sector is very cheap, with many valuations at historic lows. Mr Gibbs makes the point that a number of financial stocks are 60 per cent off their peak and even an improvement to only 40 per cent down from the peak represents a significant gain from here.

Mr Gibbs has managed Jupiter Financial Opportunities since the fund's launch in June 1997 and has managed to post positive returns even when the financials sector was something most investors wouldn't touch.

Jupiter Financial Opportunities has five-star ratings from Lipper, Bestinvest and Morningstar, plus an AAA rating from Standard and Poor's.

Jupiter Financial Opportunities was the top performing financials fund in 2008, returning 7.32 per cent over the calendar year.

Mr Gibbs began placing the fund’s assets into the perceived safe havens of cash and long-dated government bonds - at the expense of equities - during the first quarter of 2008. The fund held just over 30 per cent in cash and almost a quarter of its portfolio in bonds by the end of May 2008, which has led to turn an impressive return of 16 per cent in the six months to 18 December 2008. Gibbs also held greater exposure to insurance companies and kept his holdings in UK consumer-facing banks at a minimum.

While investors would have bought the fund for financials equity exposure rather than cash and bonds, Mr Gibbs is one of the few managers who many commentators, including Morningstar, believe has the experience and expertise to manage such asset allocation calls well. Mr Gibbs also comes highly recommended by Gary Potter and Rob Burdett of Thames River Multi managers (Investors Chronicle, 17 April 2009) for his ability to time macro decisions.

Mr Gibbs retained a defensive portfolio position into and beyond the market lows of earlier this year. The fund is only up 0.63 per cent since the start of the year, lagging the UK stock market and the FTSE Financials index. However, stockbrokers Killik & Co who say this fund is their favoured means of gaining exposure to the financials sector, point out that the longer-term numbers illustrate the portfolio's resilience. Since the start of 2008, the fund is up 4.0 per cent compared to a decline of 27 per cent in the UK stock market and 44 per cent in the financials index.

The stockbrokers also point out that the manager has a high degree of flexibility in his portfolio construction, choosing from financial sub-sectors such as banks, real estate and investment companies. Although Mr Gibbs is not averse to holding high levels of cash or government bonds when he is uncomfortable with a high weighting in equities, he has increased the portfolio's equity exposure during June.

Source: www.ft.com/funds, *Morningstar

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