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Take advantage of rising interest rates with Fidelity Global Financial Services

Banks and financial services companies have the most to gain from rising interest rates
Take advantage of rising interest rates with Fidelity Global Financial Services

Since the financial crisis many investors have steered clear of financial services companies such as banks due to concerns and confusion over how they are run, and when and how hard they might fall.

IC TIP: Buy at 165p
Tip style
Risk rating
Long Term
Bull points

Beneficial environment for financial services

Good long-term performance

Defensive qualities

Value focus

Bear points

Concentrated exposure to US banks

But financial stocks have in fact been enjoying a strong run. Companies such as banks are performing well, backed by a resurgence in global growth. Over the past three years MSCI AC World Financials index has risen 33 per cent, ahead of MSCI AC World index's return of 29 per cent.

Sentiment towards financial services, and more specifically banks, is driven by several factors. These include economic growth because banks do more business when consumer and corporate confidence increases. Regulation is another factor because stricter rules can sometimes hamper growth.

But the most important factor is monetary policy. Interest rates are rising in the US, and are also expected to go up in the UK and eurozone. This makes investments in banks and associated financial services stocks appealing.

Between the start of 2010 and the first interest rate rise in the US in December 2015, MSCI AC World Financials index rose 39 per cent, lagging MSCI AC World index. But since that turning point, MSCI AC World Financials has outperformed MSCI AC World by 8 per cent.

One manager more than able to manipulate this trend is Sotiris Boutsis, who has run Fidelity Global Financial Services Fund (LU1033663136) since 2010 and led it through a difficult period for the sector. His skill lies in his method of picking companies. He uses economic analysis to identify the countries where financial services seem to have the best prospects, and then picks companies based on their ability to thrive in that environment.

This strategy has served investors in the fund well. Over three and five years it has returned 38 per cent and 74 per cent, versus 33 per cent and 65 per cent for MSCI AC World Financials index. The fund has also outperformed global stocks more generally, beating MSCI AC World index which rose 29 per cent and 66 per cent over those periods.

Mr Boutsis focuses on large financial stocks. Since 2008, these have been mispriced in relation to the general global equity market. This gives the fund a value tilt, meaning its holdings have share prices lower than the fundamental value of their businesses. But their share prices should rise quickly as sentiment turns positive.

Mr Boutsis thinks defensively and has protected investments in a falling market better than other financials fund managers, so this could be a good option if you are worried about the volatility associated with this sector.

Fidelity Global Financial Services should also work well in the current climate. The majority of the fund's assets are invested in commercial banks, providing good exposure to more confident consumers and companies. The fund also has 44 per cent of its assets in the US where rates have risen the most and banks have most to gain.

Banks in the UK and Europe, where central banks have not yet started raising rates, remain undervalued and the fund has 8.2 per cent and 21 per cent of its assets, respectively, in these areas.

Despite having a diversified portfolio of 79 stocks, this is a specialist fund focused on one industry sector. The top five holdings are US banks and investment companies, meaning any change in sentiment towards this industry could be significantly detrimental to its returns. These alone account for over a fifth of the fund's assets.

However, almost a decade after the financial crisis, banks and financial services stocks are in a much better state, the global economy is growing and interest rates are rising. And in any case this fund's manager has shown he can navigate difficult environments and deliver good returns. 

So as a small part of the equity allocation of a diversified portfolio, Fidelity Global Financial Services looks like a good way to take advantage of rising interest rates. Buy. TL


Fidelity Global Financial Services (LU1033663136)

FUND TYPE Open-ended investment companySTANDARD DEVIATION*10.04%

Source: Fidelity, as at 28.02.2018 *Morningstar as at 26.03.2018



Fund/benchmark1-year total return (%)3-year cumulative return (%)5-year cumulative return (%)
Fidelity Global Financial Services4.8237.5274.07 
IA Global sector average3.7226.9958.8 
MSCI AC World Financials index2.3533.0164.72 

Source: FE Analytics as at 26.03.2018


Top 10 holdings as at 28 February 2018 (%)

JPMorgan Chase & Co5.6 
Bank of America Corporation5.1 
Wells Fargo & Co4.3 
Berkshire Hathaway3.50 
Morgan Stanley2.60 
Allianz SE2 
China Construction Bank Corp2 
Mitsubishi UFJ Financial Group1.7 
BNP Paribas1.7 
Credit Suisse Group1.7 

Source: Fidelity


Geographic breakdown as at 28 February 2018 (%)

United Kingdom8.00
Hong Kong2.60

Source: Fidelity