Why the global financials bull run will likely continue

A lot has changed over the past 12 months in terms of sentiment towards financials

By June 2016, Russia had invaded Ukraine, the oil price had fallen from $110 to a multi-year low of $25 (US dollars per barrel), and US banks had been sold down on fears of large oil industry exposures. These events raised concerns among investors and steered them away from financial shares. A year later however, the Sanlam Global Financial Fund’s A class has gained 42.6% versus the 18.2% return from the MSCI World Index. The question is: does this point towards a missed opportunity (up until now) and an indication of what investors can expect going forward?

I believe the financials bull run has just started

I have managed funds during two bull cycles: between 1989 and 1997, and between 2002 and 2007 when we had the global equity and financials bull market. Based on these experiences I believe we are in fact at the beginning of a global financials bull run, rather than at the end of a bull run, for the following reasons:

1. Financial activity should increase going forward
   – There are indications that the global low-growth, low-inflation, low-interest-rate environment has finally come to an end.
   – This is good for confidence, since it will trigger increased financial activity in the form of investment, lending and mergers and acquisitions.
2. The rise in financials is starting from a low base, leaving room for long-term growth
   – The upswing has started from a very healthy and low base and the financial sector generally has strong and clean balance sheets (with a few exceptions in Greece, Italy and Spain).
   – Because it starts from such a low base, the wave should last several years. This should result in higher net interest margins and improved cost-to-income ratios, which should in turn lead to a period of sustained, above-average shareholder value growth.
3. Fewer regulatory challenges mean lower costs
   – The regulatory headwinds seem to have peaked. Going forward, the automation of the additional information requirements will result in cost savings by banks and insurers.
4. Higher interest rates should enable banks and insurers to re-rate
   – Finally, the financial sector remains undervalued and higher interest rates should see both insurers and banks re-rate and outperform the general equity indices.

In short, I believe the driving forces behind the rally could continue for anything from four to 10 years, which may support financials’ outperformance of other sectors over that period.

Our fund is well-positioned to benefit from future growth and mispricings
Over the past 17 years, our investment philosophy, process and experience have led us to select many mid and smaller market cap winners that enabled the Sanlam Global Financial Fund to outperform its benchmark (the MSCI World Financials Index) consistently by quite a considerable margin (as shown in Figure 1). In addition, Figure 2 shows that – according to latest Morningstar rankings – the fund has outperformed its peers since inception, maintaining first position among 30 global funds over a period of almost 15 years. The environment we’re heading into will be conducive for medium-sized companies that a) grow faster than the large index companies and b) are often mispriced.
However, it is also vital to understand that the Sanlam Global Financial Fund focuses on investing in financial companies that have a track record of growing shareholder value and that are under-priced at the point when we invest. Based on their past five-year track records (in a tough environment) the projected growth in shareholder value for the average investment in the fund should be more than 12% per year. In addition, we feel that the shares are mispriced, leaving room for further growth in value.

Figure 1: Sanlam Global Financial Fund – 17-year record of outperforming its benchmark (cumulative returns as at 30 June 2017)

Source: Denker Capital, Morningstar

Figure 2: Performance of the Sanlam Global Financial Fund (as at 30 June 2017)

Source(s): Denker Capital, Morningstar

Note: The relatively lower 3- and 10-year returns can be attributed to short periods of low returns due to a struggling economy (in 2015/2016) and a recession (in 2008/2009).

The power of compounding for patient, level-headed investors 

Few people realise the effect of compounding, so an example may help to highlight this. If you had invested $100 in the Sanlam Global Financial Fund in 2000 you would now (end of June) have $864; if you had invested the same amount in the MSCI World Index, it would now be worth $231, only a quarter of the value of the fund investment.

Even if you invested almost at the top of the financial bull market in June 2007, the fund would still have made up for the initial loss in 2008, compounding at 3.1% over the next 10 years (versus the MSCI World Financials Index return of -0.7%, as shown in Figure 2). This places the Sanlam Global Financial Fund third in its global category and in the top quartile of all South African funds (across asset classes) over that period. In fact, the more recent quarter-end performance figures from Morningstar for the past year show that the fund was the top-performing fund out of all funds in South Africa available to the public for investment, across all fund categories.

Figure 1 highlights the short-term influence of many factors on the sector. The events in 2008 affected the financial sector much more than it did the general market. Similarly, the oil price collapse to $25 per barrel in February 2016 affected the financial sector’s performance. However, after each shock the shares recovered, proving their long-term attractiveness based on their underlying ability to grow shareholder value.

The next few years could be a golden period for financials 
We don’t think we’re in an environment that reflects either June 2007 or January 2009. However, based on our experience of the past 30 years, we think the probability is high that the next few years could be a golden period for financials.

View the latest minimum disclosure document (MDD or fund factsheet) for the fund by clicking on the links below. 

Disclaimer

The information in this communication or document belongs to Denker Capital (Pty) Ltd (Denker Capital). This information should only be evaluated for its intended purpose and may not be reproduced, distributed or published without our written consent. While we have undertaken to provide information that is true and not misleading in any way, all information provided by Denker Capital is not guaranteed and is for illustrative purposes only. The information does not take the circumstances of a particular person or entity into account and is not advice in relation to an investment or transaction. Because there are risks involved in buying or selling financial products, please do not rely on any information without appropriate advice from an independent financial adviser. We will not be held responsible for any loss or damages suffered by any person or entity as a result of them relying on, or not acting on, any of the information provided.
The Fund is a sub-funds of the Sanlam Universal Funds plc, a company incorporated with limited liability as an open-ended umbrella investment company with variable capital and segregated liability between sub-funds under the laws of Ireland and authorised by the Central Bank. The Fund is managed by Sanlam Asset Management (Ireland) Limited (the Manager), Beech House, Beech Hill Road, Dublin 4, Ireland, Tel + 353 1 205 3510, Fax + 353 1 205 3521 which is authorised by the Central Bank of Ireland, as a UCITS Management Company, and an Alternative Investment Fund Manager, and is licensed as a Financial Service Provider in terms of Section 8 of the South African FAIS Act of 2002. The Sanlam Universal Funds Plc full prospectus, the Fund supplement, the MDD and the KIID is available free of charge from the Manager or at www.sanlam.ie. This is neither an offer to sell, nor a solicitation to buy any securities in any fund managed by us. Any offering is made only pursuant to the relevant offering document, together with the current financial statements of the relevant fund, and the relevant subscription/application forms, all of which must be read in their entirety together with the Sanlam Universal Funds plc prospectus, the Fund supplement the MDD and the KIID. No offer to purchase securities will be made or accepted prior to receipt by the offeree of these documents, and the completion of all appropriate documentation. A schedule of fees and charges and maximum commissions is available on request from the Manager. This information does not constitute financial advice as contemplated in terms of the South African Financial Advisory and Intermediary Services Act. Use or rely on this information at your own risk. Independent professional financial advice should always be sought before making an investment decision, not all investments are suitable for all investors. Trail commission and incentives may be paid and are for the account of the Manager. Performance figures for periods longer than 12 months are annualised. The performance fee is accrued daily, based on performance over a rolling 6 month period with payment to the manager being made bi-annually. Performance fees will only be charged once the performance fee benchmark is outperformed.
The risk profile of this fund is aggressive: You can afford to take on a higher level of risk (i.e. will have a greater exposure to equities in your portfolio) because of your investment time horizon, or your appetite for risk. You know that in taking the risk, you need to be patient if you want to achieve the results. So you are willing to invest for the long-term and are prepared to tolerate some volatility in the short term, in anticipation of the higher returns you expect to receive in five years or beyond.
The returns and fund information included above should be read with the fund’s minimum disclosure documents. The Sanlam Global Financial Fund A (retail) class has an annual management fee of 1.25%, while the D class is the most expensive class with a fee of 1.5%. The fees exclude VAT. Source of performance figures: Morningstar. Annualised returns are returns for a period that are scaled to one year. Returns are net of fees, unless specified as gross returns. Collective investment schemes are generally medium- to long-term investments. Please note that past performances are not necessarily an accurate determination of future performances, and that the value of investments / units / unit trusts may go down as well as up. Changes in exchange rates may have an adverse effect on the value, price or income of the product. Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. Collective investments are calculated on a net asset value basis, which is the total market value of all assets in the portfolio including any income accruals and less any deductible expenses such as audit fees, brokerage and service fees. Actual investment performance of the portfolio and the investor will differ depending on the initial fees applicable, the actual investment date, and the date of reinvestment of income as well as dividend withholding tax. Forward pricing is used. Additional information of the proposed investment, including brochures, application forms and annual or quarterly reports, can be obtained from the Manager, free of charge. The Manager does not provide any guarantee either with respect to the capital or the return of a portfolio. The performance of the portfolio depends on the underlying assets and variable market factors. Performance is based on NAV to NAV calculations with income reinvestments done on the ex-div date. The Manager has the right to close any portfolios to new investors to manage them more efficiently in accordance with their mandates. Lump sum investment performances are quoted. The portfolio may invest in other unit trust portfolios which levy their own fees, and may result is a higher fee structure for our portfolio. All the portfolio options presented are approved collective investment schemes in terms of Collective Investment Schemes Control Act, No 45 of 2002 (CISCA). The portfolio management of all the portfolios is outsourced to financial services providers authorized in terms of the Financial Advisory and Intermediary Services Act, 2002.