James Ross, manager of the Henderson UK Alpha fund, has rearranged his financials exposure by ditching Lloyds, a large long-standing position.
Mr Ross’ move stems from Lloyds Banking Group’s decision to start paying a dividend for the first time since its bailout and subsequent ownership by the government.
The bank’s share price rose from 79p to 88p in the week following the announcement. But it was this dividend promise which led the Henderson manager to discard the stock from his £410m fund.
He said: “This promised dividend excited people and it was starting to get priced in a substantial way.
“However, I think eventually, given the current environment, the regulators are going to want more cash and Lloyds will feel the pressure.”
Lloyds’ share price has since dropped – albeit with the index – and is now trading at about 76p.
When taking over the fund in February 2013, Mr Ross had argued for Lloyds to be the largest position and successfully allocated 3.5 per cent.
Financials remains the manager’s top sector allocation, at 25.9 per cent of the portfolio, in spite of his decision to sell Lloyds.
He used capital from Lloyds to invest in challenger banks and also increased the weighting to HSBC, now his largest holding.
The multinational bank makes up 6.1 per cent of his portfolio, which Mr Ross described as “unusually high”. He typically holds a maximum of 4 per cent in any one position.
The manager said the elevated levels of cash he had at the start of the year, at around 6-7 per cent of his portfolio, gave him the flexibility to build a position.
As cash normally only makes up about 3 per cent of his portfolio, he saw HSBC as a good opportunity to put some of this to work.
“It is a bank that trades below its book value,” he said.
“Its dividend yield is more than 6 per cent and we think it is going to be able to continue to pay and grow that. Some people don’t agree and don’t think the dividend is sustainable, but I do.”
He does acknowledge investors’ growing concerns about the Asian part of the business slowing down, but highlighted the bank’s sizeable deposit base, which includes a significant amount in US dollar-linked securities.
He says this means that when rates go up in the US, HSBC’s earnings will jump by 30 per cent simply “because of the mechanical impact of the securities holdings”.
“Everyone is selling because of Asia, but this is a contrarian position, so as shares go down I feel more confident,” Mr Ross added.
He did, however, admit he might be six to 12 months too early on the trade. “The mistake has been in my timing but it has given me the opportunity to buy more,” he added.
Henderson UK Alpha has returned 13 per cent over one year versus an IA UK All Companies sector average of 6.5 per cent. Over three years the fund has returned 34.2 per cent compared with a sector average of 33.8 per cent.
