Despite strong global volatility, particularly during the summer rout sparked by China concerns, the Jupiter Global Financials Fund remains up about 15% year-to-date compared to 0.4% for its benchmark (the MSCI All Country World Financials Index), according to FE data.
Lead manager de Blonay, who spoke to Fund Selector Asia on a recent trip to Hong Kong, said sharp reductions in exposure to the “commodity currency economies” of Australia and Canada helped the fund mitigate market volatility.
Late last year and in early 2015, he brought down exposure to Australia and Canada to zero from 25%.
In the spring, he reduced emerging markets to 5% of the portfolio from about 25%.
“These two strategic decisions contributed greatly [to fund performance in 2015].”
"We cannot really talk about free markets anymore. They are not functioning freely anymore after the financial crisis. They are constantly being interfered with by central banks"
On the buy side, allocation to financial technology-themed companies was increased to 15% from 7% and the fund dramatically increased exposure to stock exchanges in Europe, which he explained is a “play on volatility”.
Jupiter Global Financials vs benchmark year-to-date
During the second half, de Blonay decreased exposure to retail banks that have little or no fee income operations such as asset or wealth management units.
"Retail banks do well when rates rise and do bad when rates fall. If they don’t have a fee income business to offset the margin weakness and not a decent and disciplined cost-cutting program, they will have a straightforward difficult time.”
Also recently, he has taken a position in a firm that is also a competitor, Amundi, which earlier this month listed on the Paris Stock Exchange. “We prefer to play an asset manager than a retail bank because it typically has 100% fee income and it doesn’t matter if interest rates are low.
Avoiding China’s banks
Although his fund targets banks and financial industry equities mainly in the US, Europe and the UK, he’s looked at the large Chinese banks. He said they are not expensive, often trading around book value and with a 6-7% yield. They are also internationalising and have an unofficial safety net from the Chinese government to prevent massive losses.
“My only reason I’m a bit cautious with China exposure is that at some point, especially if we have a tightening in the US, down the line there will need to be some sort of [currency] devaluation in China. A measured one, but still a devaluation that could unsettle the region.”
Instead, he’s looking at peer-to-peer lender Credit China. The concept makes sense, as it would be a legitimate source of financing against China’s shadow banking industry, he said. The main concern revolves around the firm’s short track record. Nonetheless, Credit China is growing at a fast pace and it remains on the fund’s radar.
Performance of Guy de Blonay vs peers
Rate hike signal
“What came out in the last five years is that central banks are working with you. We cannot really talk about free markets anymore. They are not functioning freely anymore after the financial crisis. They are constantly being interfered with by central banks.”
Therefore, de Blonay believes the US Federal reserve decision on the interest rate hike will have a “binary outcome”.
A 25bp increase in December would be a positive signal that the global economy is making progress. If the decision is delayed, that will send the message that the global economy is still fragile, slowing and on verge of deflation.
Either way it will be a strong statement for global investors, he said.
“If the Fed says they will hike by 25 basis points in December despite the risk of China slowing, despite the latest terrorist activity in Europe, that will signal that oil and commodities have reached a bottom and we can contemplate an inflation expectation at the end of 2016 going into 2017. Clarity and stability will be very beneficial for markets.”
For the portfolio, that means continuing to chase yield stocks in Europe as rates will remain low, and in the US, focus on companies that are asset-sensitive to rates.
“Financials, for example, will be able to refinance their book at a more profitable level. Expect a typical divergence in sectors, with the leading sector in the US not retail, but financials.”