interview
fund figure
11.1%
Exposure to banks in Kirrage and
Murphy’s UK equity portfolio
Matthew Stylianou
|
23
UK banks’ ratios are now among the
highest in the world (and the highest
since Bank of England records began in
1987), having raised significant capital in
the six years since the crisis hit. One of
the ironies of the credit bubble was that,
despite banks making extremely high
returns, they were driven by taking on
more balance-sheet risk and not by high
profit margins.
Today, new lending is highly profitable
and reflects much better the risks of
the borrowers involved. For the time
being, these robust profit margins
remain masked by losses on legacy assets
and exceptional charges, including
provisions for payment protection
insurance compensation.Over the longer
term, however, we believe the ongoing
improvement in their core businesses
will warrant significant share price
increases. Given their depressed
valuations, patience is very much a virtue.
While we are confident about the
long-term prospects for the fund, our
view on the stock market in the short
term is more cautious.This stems
from our understanding of the‘mean
reversion’ of human emotions.
Over the past two years, sentiment has
swung from being extremely pessimistic
on the outlook for equities (particularly
those that are exposed to the domestic
consumer) to one of reasonable
optimism. Some of the issues facing the
global economy have started to fade from
investors’ memories, but many of them
still exist. It is therefore prudent for us
to take advantage of recent optimism by
selling shares where we feel their long-
term prospects are priced in.
This is not driven by a belief that the
economy is about to weaken, nor that
company profits are about to fall. It is
because our strategy is founded upon the
empirically proven belief that investing
in cheaper companies leads to better
returns over time.
As a result, we are rotating out of
areas that have benefited from the change
in sentiment, where valuations are
consequently elevated, and towards areas
of the market that have been ignored,
which remain cheap.This disciplined
adherence to our value approach is
imperative in order to deliver a
long-term performance advantage.
The opportunities and
threats to the UK equity
market are far more
balanced
