In this week's Big Question, Investment Week asks which financial services companies are standing out as the sector's recovery continues.
Simon Gergel, CIO, UK equities, Allianz GI
HSBC
HSBC has had a difficult few years. Like many banks it has had to restructure its operations since the global financial crisis, shrink its assets base, and build up capital. This has led to somewhat pedestrian profit growth.
But HSBC remains an enviable franchise in the fast-growing Asian region, with profitable and valuable banking operations in many other countries like the UK, plus a strong balance sheet and a global network to service multinational corporations.
HSBC has a modest valuation, trading around net book value with a 5.7% yield. Furthermore, it stands to benefit from rising interest rates, which should position it well for the forthcoming interest rate cycle.
In summary, it is a well-positioned and modestly valued business that is being restructured to improve financial returns.
Thomas Buckingham, manager, JPM UK Higher Income fund
Jupiter Fund Management
The financial sector has had mixed fortunes from a dividend paying perspective in recent years, with many companies (particularly banks) having to cut dividends while they reduced gearing and restructured balance sheets in the wake of the financial crisis.
More recently, many financial companies find themselves well capitalised and enjoying operational outperformance.
We added Jupiter Fund Management this year, as it was delivering growth in AUM and profitability in excess of market expectations. Additionally, February saw the announcement of a material special dividend, taking the total payout in respect of the full year 2014 to over 6% based on today's share price.
We see scope not only for an improvement in dividend growth, but also in the absolute level of yield on a forward looking basis.
Scott McKenzie, investment director, Saracen UK Income fund
Phoenix Group
Financials comprise around 35% of the Saracen UK Income fund. The sector these days offers a wide choice of both growing and mature businesses, and is no longer dominated by the banks as it once was.
One of our core holdings is Phoenix Group, the closed-end life assurer. Phoenix offers a solid 6.5% yield which we believe is sustainable in the medium term, based on the cashflow expected from its existing book.
The company is likely to buy other closed books once the Solvency II rules become clearer later this year and, if structured correctly, acquisitions should further enhance the dividend prospects.
We see Phoenix as a low-risk option in an uncertain world - a robust business as it stands today with potential for significant upside from acquisitions as and when they arise.
Sam Morse, manager, Fidelity European Values
Intesa Sanpaolo
The banking sector seems to be one area where investors appear to be overlooking significant improvements in fundamentals and prospects for dividend growth among some companies.
I would not argue European banking stocks are homogeneously attractive, and in many cases they will struggle to grow (or resume) dividend payments in the medium term.
However, there are a handful of companies in the sector, such as Intesa Sanpaolo, KBC Group and UBS where the market has not yet recognised the significant improvements taking place.
Intesa Sanpaolo, Italy's largest retail bank and a large overweight in the portfolio, is one such company where I believe prospects for dividend growth are generally underestimated.
Shareholders can benefit from an attractive combination of internal change at company specific level, and external change at both industry and macro-economic level. The company's management has set out a credible and detailed plan to reduce costs and increase dividends.
Mike Fox, senior fund manager, Royal London Asset Management
'Dull' Lloyds
Dull and boring can be rewarding, while growth and innovation destructive. Counterintuitive in investment markets but let us use the UK bank sector to illustrate this.
Growth and innovation went ballistic in the lead-up to the financial crisis of 2008, with excessive lending and new, untried debt structures ultimately leading to the near collapse of the banking sector. Now UK banks are on a mission to become dull and boring.
This process, which has led to significant and structural changes in the banking sector, has yet to be fully recognised by investors. Lloyds, which RLAM owns, has a stated mission to become a low risk, UK-centric bank returning money to shareholders and has shed overseas businesses, reduced its indebtedness and simplified products to achieve this.
Gone are the days of excessive growth and poor lending. Now is the era of low growth and high income, and we welcome it.
Graham Spooner, investment research analyst, The Share Centre
Schroders
Schroders, once the bluest of blue-blooded investment banks, is now positioned as one of the most globally active asset management companies. Its client base includes large corporations, local and public authorities, pension funds and charities, as well as high-net-worth individuals and retail customers.
Around two-thirds of its assets under management are from outside the UK. Interim results in July reported a 24% rise in pretax profits to £290m.
There was a net inflow of £8.8bn of new funds, while the interim dividend rose by 21% to 29 pence. The group expects continued volatility for markets over the short-term.
To a certain extent taking a view on the company is a proxy on the markets. If you think the markets are going up, then the company is in a sector which will benefit and probably outperform. Of course, the opposite will be true if the market turns bearish.
In the current climate, we suggest a hold recommendation. However, this is a highly regarded fund management group and we would not put off investors wanting exposure to the sector from drip feeding into recent weakness.
Trevor Green, head of UK equities, Aviva Investors
London Stock Exchange
The London Stock Exchange is a diversified international exchange and it is involved in a range of equity, bond and derivative markets. It is important to clarify that what they do covers not just exchanges, but also post trade and risk management services.
Credit goes to CEO Xavier Rolet, who came in May 2009 and quickly transformed the group from a predominately cash equity operation, to a much more growth-orientated international business.
Just before his arrival, the group was on the back foot defending itself from a takeover. But now it is firmly on the front foot with it likely to be a leader in any further sector M&A.
The acquisition of Frank Russell Company in December 2014 is an example of improving the quality of the business as it enhances its presence in the US and expands its customer and product base.
Short-term attractions include a very healthy balance sheet with potential returns to shareholders likely, further synergy benefits from recent acquisitions and a re-rating versus other exchanges as investors give credit to the group for their product diversification, growth potential and internationalisation.
Greg Bennett, co-manager, Argonaut Absolute Return fund
Intesa Sanpaolo
Our largest position on the long side of the book over the past four years has been in Intesa Sanpaolo. Our starting point for any long investment in a bank is a strong balance sheet and a conservative accounting policy for bad loans, which Intesa meets.
Intesa is seeing very strong fee income from the boom in Italian asset management, largely owing to paltry returns on deposits and Italian government bonds. Fee income now makes up around 40% of revenues and continues to outpace market expectations.
We also see Intesa's net interest income reaching an inflection point this year and growing again in 2016, largely owing to lower funding costs. As such, Intesa's top-line growth story is much more attractive than the market is factoring in.
Add to this continuing lower provision costs and we see the bank offering significant surprise relative to expectations on profits and dividends over the next few years.
Richard Power, manager, Octopus UK Micro Cap Growth fund
Brooks Macdonald
Our two largest investments in the financial services sector are Brooks Macdonald Group and Mattioli Woods, both of which we first invested in during 2005 following their respective listings on AIM.
Our initial investment into Brooks Macdonald in March 2005 was 140p per share, when it had funds under management of £371m. Ten years later, funds under management stand at £7.4bn and the share price has increased to over 1,700p per share, valuing the company at £232m today.
We believe Brooks Macdonald remains on a strong growth trajectory and looks well positioned to increase funds under management to over £10bn over the next few years.
We first invested in Mattioli Woods at 132p per share in November 2005. It had an operating profit of £1.9m and was valued at just £22.5m. Over the last decade it has increased operating profit to £5.4m and the share price has increased to over 600p per share, valuing the company at £153.3m.
We continue to be a big supporter and expect Mattioli Woods to continue to grow both organically and via complementary acquisitions.
John William Olsen, manager, M&G Global Growth fund
M&T Bank
M&T Bank, which we bought in August 2014, is a financial services company that fits our philosophy. It is a New York-based regional lender that has performed steadily for many years, including during the financial downturn.
It is conservative, risk and liquidity focused, with an outstanding management team that has been able to steer clear of trouble and exploit downturns to step up merger and acquisition activity - their M&A track record is exceptional.
Over the previous year to last August, its share price had not kept up with the wider banking sector, and we saw that as a good opportunity to acquire the stock relatively cheaply.
Part of the disruption stemmed from uncertainty over its acquisition of another regional player in New York - Hudson City Bancorp - as it faced some regulatory headwinds.
After three years, the deal was finally approved at the end of last month, and is expected to be completed in November. We think this will be highly accretive and should create a good tailwind for M&T's shares.
Xavier Van Hove, fund manager, THS Partners
RBS
Our favourite financial services investment today is a bank located in one of the fastest growing developed markets in the world.
It is the largest business bank in a consolidated industry and thus stands to benefit from the economic recovery. It has had some problems in the past and had to be bailed out by the government.
This, together with repeated false starts under the previous CEO, means many analysts have given up on the company and very few rate it as a 'buy'.
However, we believe the new CEO has the right strategy and an outstanding track record, while the business itself is nearly done in deleveraging its bad bank and the core bank is posting some of the best return on equity numbers available in the industry.
Better still, it is being re-privatised, its index weighting will increase and it is available at a discount to tangible book.
The bank is, of course, RBS.
Paul Jourdan, CEO, Amati Global Investors
IG Group
IG, by its own account, is the leading global provider of spread betting and trading in contracts for differences (CFDs). It is focused on sophisticated and high-net-worth private investors.
Unlike many of their competitors, their profits do not rely on their customers losing money, as nearly all of their income is derived from the trading commissions and spreads, and most of their positions are internally hedged.
Because of their scale they can invest heavily in the technology and customer service that they offer, and this sets them apart from competitors.
We like the fact the company tends to do best when markets become choppy. We also see great potential in the company's move into online stock broking, where their technology should allow them to deliver one of the best customer propositions currently available for active and sophisticated investors.
However, they still have a lot to prove here.
