by Tom Bradley
I’m camping out in London for two months to experience life across the pond and get some different views on markets and investing. In our ‘London Calling’ blog series, I’ll be reporting back my observations and thoughts from abroad. In this, my second post, I look at how banks are viewed by non-Canadian investors.
In Canada, portfolio managers have different views on the bank stocks, but their actions follow a similar pattern. They all own them. Most Canadian-oriented funds are invested in 3, 4 or 5 of the Big Five. It’s hard not to. They’re well-financed, obscenely profitable (as a group they make over $1,000 in profit each year for every man, woman and child in Canada), pay a good dividend and account for 22% of the S&P/TSX Composite Index.
Outside of Canada, however, investor behaviour is quite different, as Salman and I have learned from our travels. Some managers have big bets on the banks, but there are others who refuse to invest in them.
The bulls on U.S. banks like them because they’re growing again and are still cheap compared to the high-flying tech stocks. Operationally they’re not in the league of Canadian banks but they’re doing okay in the face of tighter regulation, still-low interest rates and intense competition.
Some managers see the European and UK banks as having significant upside but for different reasons. These institutions had a much bigger hole to dig out of and are still considered turnaround stories nine years after the financial crisis. They’ve been going through constant restructuring and are operating in an even more hostile environment than their U.S. counterparts. The economic recovery is uneven in Europe and negative interest rates persist. The bulls believe all the bad news is already baked into the stock prices and any improvement in the landscape will translate into large gains.
Despite their exponents, the U.S., European and UK banks aren’t considered to be ‘quality growth’ stocks like the Canadian banks are.
But as I noted, what’s different compared to Canada is that there are plenty of managers who refuse to own the banks at all. They see them as black boxes – i.e. it’s impossible to tell what’s really going on inside and where the profits are coming from. As opposed to Canadian managers, they have lots of options in other sectors and bank stocks aren’t a big part of any index. The penalty for getting it wrong is not as high as it is for Canadian fund managers.
Note: Velanne Asset Management, the new manager of our Global Equity Fund, is in the latter camp. Anne Gudefin and her team are reluctant buyers of mega banks.
The banks in Canada have a special place in our society and investors’ portfolios. They behave as an oligopoly, which has resulted in a stable, profitable growth pattern. The global perspective, however, reminds us that we shouldn’t get too carried away with holding too much of our portfolios in bank stocks. The Big 5 are still banks - they have operating leverage (a small change in the top line can have a big impact on the bottom line) and are dependent on a customer base that is getting overextended.
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