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Managers Corner

Insync FM Doesn’t Hold Banks in its Global Portfolio – Why not?

16 Mar 2011
From

Insync FM Would Also Find it Difficult to Hold Australian Banks in a Global Fund Given:

  • Their overweight home loan portfolios
  • Their regional outlook
  • Their recent dividend performance

Sydney-based international equities manager, Insync FM, does not hold any banks in its 25-stock portfolio of the Insync Global Dividend Growth Fund. Why is that?

For Insync FM, banking stocks simply do not make the grade for investment at this stage. The key reasons are:

  • Banks have too much leverage  – Insync FM can get the same return from a stock like Nestle with no leverage without buying a bank that is running at 10 – 20 times leverage
  • Banking is a commodity business – it is hard to differentiate their products from each other. Thus, where is the pricing power? How will it add to their share price or dividends?
  • Consumers are deleveraging and therefore banking profits won’t be benefiting from a quick uptick in consumer borrowing
  • More Government regulation for banks means higher capital and liquidity requirements which will eat into profits. Have we seen the full effects yet of Basel III on bank profitability? We think not.
  • Banks can face liquidity troubles well before insolvency issues become a concern for an economy, e.g. Ireland and Iceland. Therefore investors need an above average return to compensate for the added risk.

“Many banks are well run but there are better international companies for a global portfolio at this time. You could not look at any developed market banks, particularly Australian banks, and comfortably add them to a high-conviction global portfolio given their risk profiles and their recent cuts to dividends. Anyway, it would be difficult to rate any Australian banks as truly global given their overweight home loan portfolios and their regional outlook,” said Mr Monik Kotecha, CIO of Insync FM.

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