Banking on challenge
The collapse of Silicon Valley Bank (SVB) in March and the subsequent emergency rescue of Credit Suisse are real-life examples that highlight some of the structural risks and unfavourable industry dynamics in the banking sector. As we assessed the sector over the years, we have struggled to find companies that, in our view, will be able to create sufficient shareholder value over the long term.
Here are some of the main reasons why we do not invest in banks based on our fundamental research:
1. Competition and customer power
With many banks operating in each market, all vying for market share, competition is intense. And with a high number of banks to choose from customer power is high.
2. Disruption risk
There are new “challenger banks” entering the sector. Often technology led, many of these companies can give customers an enhanced user experience, whilst at the same time being able to harness the data intelligence that comes with superior technological platforms. This often results in the delivery of customised services and solutions that are attractive to customers. Many of the large banks are less agile and have legacy systems that make it harder for them to compete and susceptible to the disruption of the new challengers.
3. Low pricing power
We prefer to invest in companies with control over their margins because it’s an important factor in the delivery of sustainable returns over the long term. This margin of safety also offers a level of protection in difficult trading conditions. The risks mentioned above all contribute to banks having little control over pricing which can make them vulnerable to unexpected market conditions or events.
4. Regulatory risk
The banking industry is highly regulated and is at risk of tighter, more restrictive regulation. Previous financial crises have shown that when banking regulators are facing systemic risk, they have tended to impose additional, more stringent requirements which can impact their growth prospects.
5. Systemic risk
The interconnectivity within the sector increases systemic risk. Failure in the banking sector typically has repercussions in the broader economy, but it makes the sector particularly vulnerable to potential equity value destruction.
The benefit of our unconstrained approach
Martin Currie Global Portfolio Trust has an unconstrained approach which means we can focus on finding the very best stock ideas from around the world. We are free to select companies from any sector and are able to avoid those that we judge to have unfavourable industry dynamics or an unappealing return profile.
We analyse the global markets to identify sectors with strong structural growth trends. And from those, we construct a portfolio of 25-40 businesses that we believe generate sustainable returns, have superior structural growth potential, and low risk profiles.
We believe that is a formula to deliver attractive returns for our shareholders over the long-term.
The information provided should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the securities discussed here were, or will prove to be, profitable.
Important Legal Information
This information is issued and approved by Franklin Templeton Investment Management Limited (FTIML). It does not constitute investment advice.
The information provided should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the security transactions discussed here were or will prove to be profitable. These opinions are not intended to be a forecast of future events, research, a guarantee of future results or investment advice.
Past performance is not a guide to future returns. The return may increase or decrease as a result of fluctuations in the markets, in currency and/or in the portfolio.
Market and currency movements may cause the capital value of shares, and the income from them, to fall as well as rise and you may get back less than you invested.
The analysis of Environmental, Social and Governance (ESG) factors form an important part of the investment process and helps inform investment decisions. The strategy does not necessarily target particular sustainability outcomes.
The opinions contained in this document are those of the named manager(s). They may not necessarily represent the views of other Martin Currie managers, strategies or funds.
Shares in investment trusts are traded on a stock market and the share price will fluctuate in accordance with supply and demand and may not reflect the value of underlying net asset value of the shares. The majority of charges will be deducted from the capital of the company. This will constrain capital growth of the company in order to maintain the income streams.