Are financials funds worth the risk?

Amid a torrid few weeks for global markets, the banking sector took one of the greatest beatings during the recent sell-off with bans on short-selling adding to their woes.

In the US, Bank of America saw shares fall 20% on 8 August alone, while Citigroup shares tumbled 16.4% and JPMorgan Chase & Co. fell 9.4%.
 
European stocks were also hit badly as fresh fears of eurozone contagion spooked markets. French bank Société Générale tumbled by as much as 23% on 10 August, while Credit Agricole and BNP Paribas fell 11.8% and 9.5% respectively.
 
With markets in turmoil, speculation we are heading for another global recession is mounting, and much like in 2008, banks look set to bear the brunt.
 
So is investing in specialist financials funds too risky or is it actually an opportune time to increase your exposure?
 
Despite the negative outlooks for banks, financials managers are keen not to encourage comparisons with the financial turmoil of 2008 after the collapse of Lehman Bros.
 
“We are not in 2008. Banks have considerably more capital and balance sheets are more liquid,” says Kokkie Kooyman, manager of the top performing Sanlam Global Financials fund.
 
Meanwhile, Sotiris Boutsis, who manages Fidelity Funds Global Financial Services fund, says the market sell-off has been quite indiscriminate and valuations in many cases are out of sync with fundamentals. This is creating opportunities but the key is to know exactly where your fund is invested.
 
“At this point you shouldn’t be blindly selling these financials funds,” says Polar Capital’s John Yakas.
 
“The value is there but you have got to be careful you are investing in a fund that is quite focused in terms of what it is trying to do.
 
“The worst thing would be to buy someone who is following a slightly generic approach to financials. That will skew you towards big cap, Western banks and that is where some of the greatest pressure is.”
 
Yakas, who manages Polar’s Financial Opportunities and Asian Financials funds, is under no illusion the sector will remain under pressure as governments, corporates and individuals continue to de-leverage.
 
His cash positions are slightly higher than normal – they are running at about 2%-2.5% in both funds - but they are nowhere near the highs reached at the pinnacle of the crisis in 2008 when they were running at 15%-20%. He attributes this to the fact most banks have doubled their capital over the past three years.
 
Although Yakas owns virtually no big US or European banks, he is not writing them off completely.
 
“On a pure value basis, some of the big banks are very cheap and are trading at half book value,” he says.