Bill Mott, one of the most respected income-fund managers of the 1990s, has
marked his return to day-to-day management with a contentious move - buying
beleaguered bank stocks.
The self-confessed contrarian investor with a doctorate in quantum physics ran
the high-profile Credit Suisse Income fund for 10 years from 1986,
delivering a return of 452% compared with 381% for the FTSE All Share,
according to figures from adviser Hargreaves Lansdown.
In 1996 he left, returning in March 2000 when the tech bubble burst. In the
next three years he delivered returns of 35% when the market was down 28%.
He left Credit Suisse for good in 2006, resurfacing this year at the start-up
boutique Psigma Asset Management, where he has been running their Income
fund for six months.
At a time when most managers declare themselves to be “bottom-up” stockpickers
who focus on balance sheets, he looks at the bigger picture. He said
companies can do well just because they are running with the tide, even if
nothing has changed in the fundamental business. He is not afraid to go
against the grain, and has a quarter of his fund in the bank sector despite
its hammering last week.
Why have you been buying banks in this climate?
When we launched six months ago, I felt there was a valuation anomaly between
the mega caps - the top 25% of the index - and the rest of the market, which
had been driven higher by private-equity money. We initially went into the
banks as part of the mega cap bias of the fund, but over the last few weeks,
as the noise and nervousness in the banking sector has got greater, we felt
it was a good opportunity to increase our exposure.
Do you own Northern Rock?
No, we didn’t own the stock at the time the news broke and we still don’t. I
felt its business model was such that it had a higher level of risk than the
banks generally.
I didn’t anticipate that the impact of Northern Rock on the sector would be as
extreme as it has been, otherwise we would have reined in our exposure to
the banks a bit more. But I think that if you have people queueing outside a
bank to get their money out, it’s difficult to believe that sentiment could
get much worse, so I think we should be close to a nadir.
In my history of running money, and it could all be different this time, on
nine out of ten occasions when the market is pricing in Armageddon in a
particular sector, it is normally right to buy. And if this is the one in
ten occasion when Armageddon does occur, then my guess is that you would
lose more money in sectors other than the banks that have not been hit so
hard.
In fact, you could argue that if economic sense ruled, the man in the street
would have been queueing outside the Northern Rock to put money in because
you are getting very attractive commercial deposit rates at National
Savings-risk profile.
The only two banks that we don’t own are Northern Rock and Standard Chartered
because it has a much lower yield.
We have picked up more in Alliance & Leicester and Bradford & Bingley
in the past couple of weeks at lower prices.
What other themes are you playing in the portfolio?
We are overweight in companies with exposure to emerging-market consumption,
because we do think the balance of economic growth will switch. The global
economy is going to be stronger for longer, with 200m new workers coming
into it from China, India and Latin America. We think we are in a global
revolution that we have not seen since the industrial revolution.
Our biggest relative bet is in British American Tobacco, which should grow
fast in emerging markets. We also own Rolls-Royce, a good play on more
Chinese and Indians and Brazilians travelling. We also own Prudential and
Diageo, which have large Asian businesses. We also own growth stocks like
Aggreko, which provides temporary power in Africa, where their
infrastructure is not built up yet.
Can the bull market go on?
I would say that the long-term fundamentals remain positive, and I will only
change that if we get a pickup in inflation because if we go to new levels
of interest rates, that’s what tends to kill off long-term bull markets. The
pressure is for interest rates to be reduced, not to be increased.
Now it may be that as interest rates fall, it exacerbates global growth and we
find that there was no need to cut rates. There is no doubt that cutting
interest rates after the 1987 crash and after the Long Term Capital
Managment crisis in 1998 exacerbated the final phase of the bull market in
those periods. It could be that loosening monetary policy now in the wake of
the financial uncertainties will ultimately get us to an overegged position
in equities later on, but I think it is too early to be worrying.
When people are worried about both recession and inflation, the likelihood is
that we will bumble along somewhere in the middle and that is always
bullish. It is at the extremes that things become dangerous.
What have you learnt most after 30 years?
I have lived through periods when the trade figures were vitally important for
the UK economy, but most managers don’t know what they are nowadays. I have
lived through periods when we would wait outside the Bank of England on a
Tuesday afternoon for the weekly money-supply figures because in a
monetarist Thatcherite Britain they were key to markets.
Now that’s been derated. There are always new dynamics that drive the markets.
The key is to spot them.
Look at the money that has been made in the mining stocks. Nothing has
happened to the stocks themselves, they are still the same companies that
they were. But the environment in which they are operating has changed, with
all this increased demand in the global economy - it was spotting that
change in the macro-economic landscape that led you to buy the miners.
You called the last housing crash. Will we get another?
I think that the banks are going to tighten their lending criteria, which will
be negative for the housing market. But the positives are aspirational and
demographic, and I think there is a big wedge of middle-class, middle-aged
Britain who fear inheritance tax and will help their children on to the
housing ladder. The negatives and the positives will counterbalance and
housing will remain subdued for the foreseeable future but will not crash.
What to do with your windfall shares
Millions of investors who got free windfall shares when banks demutualised in
the late 1990s have been hit hard by the turmoil in the sector, writes
Clare Francis. So is it time to sell?
Northern Rock
Just under 900,000 people received 500 windfall shares when the
Newcastle-based building society became a bank in October 1997. The shares
cost 452p at flotation and hit a high of £12.51 in February this year,
although they slumped to 184p last week as brokers said a bid was unlikely
above 150p.
Hoodless Brennan, a sharedealer, said the shares had fallen so far that 85%
more investors were buying than selling last week.
However, Nick Rayner at The Share Centre, a stockbroker, said: “We doubt
Northern Rock will be taken over at a premium - who’d want to pay for a firm
with such a tarnished brand?”
Justin Urquhart-Stewart at Seven Investment Management suggests that you sell
now while the shares still have some value.
Alliance & Leicester
The crisis at Northern Rock has generated speculation that A&L could be
similarly hit. The bank has told customers and shareholders it has no
funding problems, but its shares have still gone into freefall.
Shares in A&L ended the week down 16% at 737p. They are still 19½p above
the 545½p flotation price, although they hit a high of £12.48 in April 2006.
But analysts say the underlying business is sound and you should hold.
Bradford & Bingley
B&B has also sent out a message that all is fine. It launched a
market-leading easy-access account at 6.4% last week, which will lessen its
reliance on wholesale funding. But most analysts polled by Digital Look, a
financial website, rate B&B a sell.
Rayner said: “It is reliant on the buy-to-let and mortgage markets. With
growth expected to slow, it could suffer.” He recommends selling the shares,
now 300p – 21% higher than at flotation.
Halifax Bank of Scotland
About 7.5m people got shares when Halifax demutualised in 1997. They have
fallen in line with the sector, but analysts say the company is among the
strongest of the former societies. The shares closed at 847p on Friday,
114½p above the 732½p float price. Analysts think they will rise when
markets settle, so are a hold.
