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Schroders stands out in buying banks after royal commission

Glenn Freeman  |  20 Dec 2018Text size  Decrease  Increase  |  
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Among the five top Australian fund managers, Schroders stands alone, having gradually increased its financials allocation in the wake of the banking royal commission.

Responses to the banking inquiry by Australia's fund managers have varied, Morningstar research shows. Australian stock holdings data compiled by Morningstar reveals some have reduced their underweight positions relative to the benchmark, while others have cut – though none has responded too aggressively either way.

Perpetual, Pendal, Schroders, Fidelity and Investors Mutual manage the largest portfolios locally, and are regarded as either gold, silver or bronze medallist funds by Morningstar's manager research team.

Morningstar manager research analyst Michael Malseed doubts fund managers are bullish on the banks.

"Given the preliminary findings from the royal commission, and where we are in the housing cycle, I wouldn't say anybody's bullish on the banks at the moment, though some have been closing their underweight positions,” Malseed said.

"But investors should be aware that even a benchmark position gives them a relatively high exposure to the banks."

The big four plus Macquarie Bank account for 25 per cent out of the total 32 per cent financial services weight in the State Street SPDR S&P/ASX 200 ETF (STW).

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Accurately gauging Australian fund managers' weightings to specific financial stocks can be hard as there is still no compulsory disclosure requirement. Though companies within the funds' top 10 holdings are usually publicly acknowledged.

As a work-around, we've used a proxy to track their Australian financials exposure, instead of trying to determine their holdings of individual banks.

We've tracked how each of the following funds weightings to the above index have shifted:

  • Perpetual Australian Share (4361)
  • Pendal Australian Share (2726)
  • Schroder Australian Equities (794)
  • Fidelity Australian Equities (12292)
  • Investors Mutual Australian Share (5339)

Among these five, Perpetual has made the biggest change to its financials allocation. Having increased its weighting before the royal commission, it has been gradually reducing it since.

Aussie equity funds

Source: Morningstar

As the above chart shows, more pronounced re-weightings occurred in July and August 2018 – when commissioner Kenneth Hayne and his team uncovered some of the most damning findings of misconduct by Commonwealth Bank, then National Australia Bank and AMP.

Perpetual's Australian share strategy holds a Morningstar bronze medal, regarded as a solid offering that has delivered historic returns of 4.3 per cent and 3.47 per cent over three and five years, respectively.

A buying opportunity

By contrast, Schroders – as the grey line shows – gradually closed its underweight financials position, possibly seeking to leverage the banks' lower share price valuations as a buying opportunity.

Schroders is a Morningstar gold medallist, and manager research analyst Ross MacMillan says portfolio managers Martin Conlon and Andrew Fleming are "among the most insightful in the market, always seeking to balance risk and return over the long term".

All four of Australia's retail banks rank within its top five portfolio holdings:

  • Commonwealth Bank - 6.95 per cent
  • ANZ Bank - 5.55 per cent
  • Westpac Banking Group - 4.91 per cent
  • National Australia Bank - 4.08 per cent

Two stand pat, one reduces

Fidelity and Investors Mutual's financial weightings remained relatively stable from July-August last year, while Pendal also cut its positions slightly.

Fidelity is also a Morningstar Gold medallist. Commonwealth Bank and ANZ Banking Group occupy the first and third positions within its top 10 holdings.

Fidelity's fund typically holds between 30 and 50 stocks. Morningstar analyst Andrew Miles says its portfolio is "fairly concentrated, with the top 10 holdings constituting about 55 to 60 per cent".

Fidelity sometimes tracks the index somewhat , and "active share has been moderate relative to its peers," Miles says, "though it is still differentiated from the index.”

That said, Miles doesn't view the manager as overly exposed to financials or any other sector: "It offers solid diversification, is free from a strong bias to any particular sector, and is without excessive exposure to individual companies".

Investors Mutual: strict discipline

Investors Mutual's Australian share strategy, headed by local industry doyen, Anton Tagliaferro, is a Morningstar Silver medallist.

Financial services comprise a 27.5 per cent overall weighting, and Commonwealth Bank, Westpac and ANZ Bank are within its top five – comprising 6 per cent, 5.15 and 4.97 per cent, respectively.

As of 30 September 2018, both Commonwealth Bank and Westpac remain the top two holdings within IML's portfolio holdings – with 7.9 per cent and 6.26 per cent weightings, respectively.

"IML's investment discipline is one of the strictest in the market, comprehensively assessing companies to ensure the resulting value portfolio is low turnover and low volatility," says MacMillan.

"Portfolio positions are determined both by price targets and the level of conviction in predicted future cash flows."

Pendal: well diversified

Pendal Australian Share – a gold medal strategy, according to Morningstar analyst Sarah Fox – holds around 50 large cap names, often concentrating around 60 per cent in its to 10 holdings.

Commonwealth Bank was the largest single holding, at 7.5 per cent of the total portfolio as at 31 October 2018; Westpac was third at 4.12 per cent and ANZ Bank fifth at 6.78 per cent.

According to Fox: "Australian equities can make up a significant part of a well-diversified portfolio and this strategy's well-diversified nature means it could be a core part of that allocation."



is senior editor for Morningstar Australia

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