Financials have proved a powerful driver of performance but valuations are already reflecting a lot of the positive news for banks, BlackRock’s Michael Fredericks has told Citywire Selector.
Fredericks, who runs the $6.9 billion BGF Global Multi-Asset Income fund with Alex Shingler and Justin Christofel, said one of the fund’s primary sources of financial exposure is to preferred stock, which is almost exclusively in banks.
'We are currently in the process of pairing back on some of that exposure on individual names within the space. There is a lot of positivity around the asset class, it’s been a large allocation to the fund and it has performed really well.
'Positives include a stronger growth backdrop that has been supportive of increased volumes of loan origination and the expectation that interest rates will gradually move up has also been a positive for bank earnings.'
With top holdings including Royal Bank of Scotland (0.49%), HSBC Holdings (0.45%) and Morgan Stanley (0.39%), Fredericks said, despite positive moves from the sector, investors need to look at what is actually priced in.
‘A lot of things have already been priced in such as bank earnings under the new Trump administration and the regulatory framework in the US. The preferred stocks we own in the portfolio are up over 11% year to date.
'But the inverse of this means that the yields on those preferred stocks have come down a reasonable amount year to date. It’s not that we don’t like the space, it’s that valuations have become more elevated.
'We feel like now is the time, particularly within preferred stocks, to differentiate and to sell down some of the lower quality banks and look to rotate into the high quality issuers.'
Having managed the fund for over five years, Fredericks said the biggest challenge the team has faced was deciding how much duration to take.
'Duration has been a very reliable source of volatility control or a source of hedging. In general having duration in the portfolio has mostly been very beneficial to lowering the overall level of risk.
‘There are a few exceptions, such as in the US when the taper tantrum in May 2013 where the opposite was true and having more duration added to your losses in that episode.'
Fredericks said the team has been concerned about the rise of interest rates, when in fact they have remained lower than they would have expected.
‘I would say that one of the things we have missed, and if we were to do it over again, we would have had more duration in the fund,' he said.
Over the three years to the end of August 2017, the BGF Global Multi-Asset Income fund returned 8.23% in US dollar terms. This compares with a 10.63% rise by its Citywire-assigned benchmark, the LCI MSCI World/Bloomberg BC Global Aggre (50:50), over the same time period.