The large composition of Swiss cantonal banks in the small- and mid-cap index is strong enough reason to underweight financials, Citywire AA-rated Paul Schibli has said.
Speaking to Citywire Selector, Schibli said smaller banks appear good value but he is steering clear of them in his Mirabaud - Equities Swiss Small and Mid Cap fund.
‘These small banks have cheap book value, there is good return on capital about 10-15%, they also provide a good cash flow and pay a lot of dividend. However they are very illiquid for the size of our fund, most of them drop out at the top line of our stock-selection process,’ said Schibli.
Schibli said there are plenty of property stocks in the banking sector, which make about 6-7% of the total index, with around five Swiss property firms here. But, the fund manager doesn’t like the sector at the moment.
‘Immigration will decrease and foreigners will be opening new business at a slower pace. With the interest rates at the bottom we see no value in that space. There is no way for property values to go up and there is a lot of downgrades of new valuations,’ said Schibli.
Schibli is convinced both big and small banks in Switzerland will profit only from higher interest rates, as, currently, with negative interest rates they don’t earn anything out of the interest rates differential.
‘They have a huge cash pile on their balance sheets. If this situation persists for longer, they will have to pay 0.75% negative interest rates. Banks are cyclical stocks and higher interest rates and better economic environment will help them later on.’
One unloved stock
However, Schibli did name one stock in the unloved sector, which is now the biggest position in the portfolio at 5.9% of exposure, which is a Zug-based Partners Group. This investment manager invests across private equity, private real estate and infrastructure.
‘Partners Group is able to grow its business every year by more than one billion. They find new assets quite easily and signed around 50 new projects. Their business model is also stable with possible annual performance appreciation of at least 10%,’ said Schibli.
Schibli has always had a slight overweight but increased it to three percentage points over the index after the company did a stock offering in December. ‘The company didn’t do capital increase but original founders placed CHF 590 million in the market, one fifth of which meant for employees stock option plan. We participated in it.’
Avoiding cyclical value
Schibli aims to find stocks which deliver secular growth of 3-5% and Schibli likes pharmaceutical company Sonova, which falls into his preference for growth-oriented companies.
He said the stock is not expensive, as it suffered recently due to problems with new product lines in the US. Schibli recently increased his exposure, making Sonova his third biggest holding at 5.4%.
‘In the second half of 2016 the company will start to sell more in the US and UK. The stock on this level has a potential to pick up its performance 10-20% over the next two years,’ said Schibli.
The Mirabaud – Equities Swiss Small and Mid Cap fund returned 49.1% in Swiss franc terms over the three years to the end of January 2016. This compares to a rise of 45.2% of its Citywire-assigned benchmark, the Swiss Performance Index Extra TR, over the same period.