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JO Hambro Capital Management’s Mark Costar believes there is more value to be found in RBS and Lloyds Banking Group than Barclays.
Costar, who had largely avoided banks for some considerable time, has moved his 55-stock JOHCM UK Growth fund’s (which he co-manages with Alex Savvides) exposure to the sector into an overweight position in the past three months on signs of an improvement in conditions.
He has cut his exposure to Barclays from being 2% overweight to an underweight.
Costar views both RBS and Lloyds as stronger investment players than Barclays, even though the first two have suffered the ignominy of falling under state ownership.
‘While there’s likely to be a deterioration on return of equity [on Lloyds], the market has failed to focus on the improvement in their quality of earnings,’ Costar explains. ‘After the turmoil, the barriers to entry in the banking sector are significant higher and the competitive threat to the likes of Lloyds is lower.
‘Additionally, the banks’ leverage position is significantly lower, also improving the quality of earnings. All of the surplus capital generated will compound down to the investor. This is a very powerful circle.’
Lloyds has recently confirmed it is looking raise £13 billion through a rights issue as part of a restructuring programme to reduce its dependence on the government’s Asset Protection Scheme (APS). Costar said the bank was well placed to gain market share, compelling him to invest 2.17% of his £364 million fund into the stock.
He intends to participate in the rights issue. 'We have seen the fund raising as expected at Lloyds and underlying trade has improved since we heard from them. Demand for the rights issue is strong and we intend to support it.'