After the Brexit vote, the U.K. market took a hit—and financials weren’t immune.
“The performance of banks and financials in the U.K. in the days immediately following [the referendum] outcome reflected the shock in the market,” says Alessandro Valentini, fundamental portfolio manager at Causeway Capital Management in Los Angeles, Calif. But, “since then, what we have seen is the banks and insurance companies recover[ing] significantly.”
In fact, since June 2016, “The U.K. financials in our portfolio, both on the bank and on the insurance side, have been […] the best-performing sector,” says Valentini, whose firm manages the Renaissance Global Markets Fund.
That performance has been driven by two things.
- U.K. resilience. the U.K. economy didn’t decline as much as expected following Brexit. “Currency movement helped this,” says Valentini. “But, in general, we haven’t seen the level of economic contraction that the market was expecting.”
- Interest rate trends. “We’ve seen a trend toward global reflation, and we’ve seen rates in the U.S. move up, and that’s a help,” he adds.
Self-help for financials
Brexit negotiations hang in the balance, but “financials in [our] portfolio are well-positioned to face this uncertainty,” says Valentini. That’s because “the fundamental investments used in our financials [are] based on self-help stories, rather than purely relying on the economic recovery in the U.K.”
An example is Barclays. “This is a true restructuring story,” says Valentini. “Management is focused on improving returns, and that is independent of the macro picture.” For example, management is shedding businesses with subpar returns in favour of those creating returns of shareholders’ capital.
Another self-help success story is Prudential, an international financial services group. “This is an extraordinarily well-run company,” says Valentini, explaining that Prudential suffered in the wake of Brexit for being headquartered in the U.K., but most of its business is outside the country.
“Prudential has a large life insurance business in the U.S. that benefits from rates moving up,” says Valentini. “And it’s a leader in life insurance in Asia, which is a market that is not only consolidated, but it’s also significantly under-penetrated.” Those market opportunities make Prudential “extremely attractive — especially given the valuation,” he adds.
Valentini takes a bottom-up approach with his fund. “We invest in individual companies on their own merit,” he says. “As such, we own companies that are headquartered in the U.K. that are global companies in attractive positions.”
That includes biopharmaceutical company AstraZeneca. “The market is focused on short-term […] revenue declines from compounds going generic, without giving the company credit for [its] strong pipeline,” he says.
He also likes U.K.-domestic Travis Perkins, a building materials supplier. “Management is embarking on an investment program that should further consolidate the advantages this company has over other U.K. competitors,” including cutting costs to protect margins.
Even in a weaker economy, “we would expect Travis Perkins to gain market share,” he says. “This, again, is a domestic U.K. company with a significant amount of self-help and restructuring ability.”