He recalls one situation in the wave of interest from Japanese businesses wanting to buy into Europe when a property company was on the verge of being purchased, and he stepped in. “It was a terrible deal and reluctantly they didn’t do it. Of course, it went bust.”
This underlines how Mumby’s extensive background in London-based financial services prior to joining Jupiter in 2006 helps with the running of a Sicav fund specialising in the financial sector, the fund group’s Global Financials Fund.
After a degree in mechanical engineering, which he says was not the career for him, Mumby became an accountant before moving to merger & acquisitions and structured finance work in banking.
“Working in investment banking, particularly in structured finance, was a good background, particularly during the crisis in 2008. Also, having worked in accounting there are a lot of benefits in knowing your way around a balance sheet or a profit and loss account.”
Geared to growth
A key consideration with the focus of this particular fund is that the financial sector is geared to economic growth, though Mumby makes the point it is not just about banks.
“Banks are particularly sensitive but there’s the insurance sector, all the specialist financial companies, the property sector and plenty of things other than banks. But the point is correct that the sector will do very well in an improving economic environment and will struggle when economies are in decline.”
Mumby’s colleague at Jupiter, Philip Gibbs, who ran the Global Financials Fund before Mumby took over, had notably bearish macro views in 2012, such as foreseeing a crisis in debt imbalances in the northern developed markets.
Mumby, for his part, argues that actions taken by the European Central Bank and the politicians has allayed the concerns that were there after the banking crisis, about the slowdown in economies and the level of debt. “So far the issues have been managed quite well. I think the surprise has been the European politicians have expressed such a robust commitment to keeping the European Union together.
“At the moment we’re seeing the economies bottom out, and that’s been reflected in the decline in the southern European sovereign bond yields. That’s been a very noticeable feature of the past year or so and it is still going on at the moment.
“Spanish yields are coming down and Greek and Italian yields have come down, which has helped the recovery and the share prices of the financial stocks significantly.”
He adds that Gibbs, who recently announced his planned retirement next year, is a good friend of his, having worked with him in 1979.
“I’ve known him since then and it’s been a profitable friendship. I’ve done very well out of the funds he ran. He did a fantastic job with the Financial Opportunities Fund, building it up from scratch to £1.5bn. It did particularly well during 2008 at the crisis. That was the reason I joined.”
Asset indicators
Drilling down into the sector allocation of the fund, banks have the highest exposure at 38.3% but, as Mumby says, this is a relatively low underweight position in comparison with conventional funds.
By market capitalisation, banks will always be a big part of the financial sector and there are both difficult and favourable issues to consider.
So although worldwide economic growth is not particularly good, it is reasonable in the US and, relative to expectations, in Europe. It’s under pressure relative to where it has been in China, Brazil and India, and other countries that have seen a slowdown.
On the other hand, continuing very low interest rates and low inflation are positive evaluations. However, those same two economic indicators are negative for the banks’ net interest margins, which expand with a steeper yield curve and pose long-term threats to the life insurance companies that potentially can have some onerous liabilities to their policyholders if interest rates don’t recover in due course.
Geographically, the fund is currently positioned towards the developed markets of Europe and the US, which, in the latter’s case, has seen opportunities to tap into stocks geared to an improvement in the housing market.
“While the banks have been struggling on the growth and revenue side, they’re obviously seeing the bad debts come down at a steady pace because a lot of the bad debts, the credit costs, are tied in with house prices. So, recovering house prices are beneficial for the credit costs of the banks in the US.”
Prospects are looking a little better in Europe but the significant change in allocation over the past six months has been a reduction in all emerging market exposure to about 5%. “We’ve hit problems in particular with Brazil and India, but they were never particularly high weightings anyway.”
As for the Middle East, he did have some exposure there before the banking crisis, including First Gulf Bank, which generated a lot of capital from inflating its property portfolio.
“You need to be in a pretty decent economic cycle there to really have a commitment to what’s quite a small part of the overall market,” he says.
Nice little earners
One of the ways Mumby runs the fund is to target high-return businesses, particularly cash earners such as asset management companies, insurance brokers and estate agencies.
“Any of those sorts of business can do very well in this environment of low interest rates and low inflation because their ratings go up a bit. Unlike some of the banks, where the return on equities is under pressure by persistent regulation of capital that makes it much more difficult for them to get a high return.”
Examples of the stocks he likes are Schroders, Invesco’s operation in the US, estate agent Savills and insurance broker Jardine Lloyd Thompson.
“MasterCard is another one that is a classic sort of cash earning and operational leverage play. They’re quite a feature of the fund at 3.6%.”
Mumby takes all his own decisions as the lead fund manager for the Sicav and the UK-registeredInternational Financials Fund, but he pools ideas with Guy de Blonay who runs Jupiter’s UK-registered Financial Opportunities Fund.
“If one of us is out, the other one can deputise for the other because we know what we’re doing and why we’re doing it. But we do have different angles we like to play.”
While Mumby tends to do his own research he says De Blonay has got a wider source of brokers he uses.
“I prefer to take my own view rather than what the sales side are saying and, generally, I’ll give him my ideas. He’s a little bit more macro-based than I am and he’s probably got some more technology situations than I would have.
“He’s got more in the US, probably about 50%, whereas I’m 40%, and he’s got a bit more in Japan. I think it works quite well not to have a formal committee meeting. We just run our own funds and that spurs us to try and do a bit better.”
Future proofing
Looking ahead, Mumby hopes to take advantage not only of high-return businesses but also some special situations, where some of the more difficult businesses are discounted.
“As those businesses are scaled back, the high returns could come through, so Lloyds Bank and UBS are pretty clear examples of that. There are some high returns in the banking sector but they’re special situations rather than the norm.
“I think the norm is struggling to make much of a return on equity but, on the other hand, the cost of equity is coming down, the competitive environment has changed completely, so the banks are enormously better situated than they were.
“They’re being better run for profit rather than for market share, so I think we are probably in for a period of a few years where the competitive dynamic is quite favourable.”
He also believes consumer trends in the emerging markets will come back. “They’re still there but we’re just cyclically struggling. I quite like car insurance as a theme in emerging markets, and shopping centres.”
The longer-term goal is to do as well as Gibbs did with specialist financial funds. “He started those from nothing. These are only small funds but, hopefully, with a bit of consistent performance they can start to grow like his funds did originally.”
