Guy de Blonay, manager of New Star's Global Financials fund, believes diverse sector offers a natural hedge against market volatility
Investors in global financials have long had two star managers from which to choose. New Star's Guy de Blonay and Jupiter's Philip Gibbs both have long-term track records with funds in the sector, and high profiles to match.
Before joining New Star, de Blonay worked alongside Gibbs, who manages the £940m Jupiter Financial Opportunities vehicle.
Today, de Blonay's £245m New Star Global Financials vehicle has outperformed not only the Jupiter vehicle but most of the Specialist sector over three years to 19 March, with bid to bid growth of 114.8%, according to Morningstar.
Over the same timeframe, Gibbs' fund returned 72.2% while the disparate peer group grew by 68.2%.
The New Star vehicle also outperformed its rivals from JPMorgan, Swip and Axa Framlington over the period.
However, with volatility the mark of global equity markets for almost 12 months and an uncertain year ahead, intermediaries are looking for assurances that a sector-focused fund can provide the necessary diversification to avoid the downside of further corrections.
A lot of firms have been launching multi-asset funds recently and cash has been flowing into property vehicles. Is a global financials fund too specialised in today's market?
The fund has a global mandate in the largest sector in the world, taking up over a quarter of the MSCI World index. The financials sector also includes the most diversified range of firms, which have low correlation between them.
For example, asset managers and banks tend to benefit in a rising market, while hedge funds and derivative suppliers benefit in a falling market. There are also more specific situations, with the aftermath of 11 September 2001 leaving insurance companies very cheap.
I think financials are a natural hedge. I still think there is liquidity out there and the impact of the problems in the US sub-prime loans market will be contained.
You started at Jupiter and John Duffield recruited you soon after he established New Star. Do the house styles at Jupiter and New Star differ? How have they affected your day-to-day management?
Both firms allow the freedom for each manager to follow their own ideas as long as they have found their own theme or trend. As long as performance comes out of it, managers are free to follow their instincts or ideas. At both firms, when we have a conviction we back it as much as we can.
I feel a lot of responsibility is evaporating in committee-driven processes. It means that if there is a lack of performance, it is difficult to see who is responsible.
What did you learn from your time at Jupiter?
The learning curve was steep when I joined the UK specialist team, and especially for the past two years. As I progressed, I gained a more global view and the knowledge to choose stocks on a global basis. Sharing meetings with Philip Gibbs and Tony Nutt helped me to understand the basic principles.
There are some highly technical areas within the financials sector. How do you deal with valuing insurance firms, for example?
Some of our models are outsourced. I have my own for asset managers and banks but for insurance companies, our spreadsheets are modelled on those used by the analysts we think are the best in the sector.
At the moment you have some very strong regional and sectoral bets. Why is over 80% of your portfolio invested in Europe?
European banks have the opportunity to grow through exposure in emerging markets and Eastern Europe, Russia and Turkey, and even India and China. Credit growth is where European banks will become effective with the potential for household ownership to rise. For example, the total mortgage book in Russia is around $8bn, while $700bn is average for a bank like Barclays.
Also, life companies in Europe are very cheap compared with South Africa and the UK, and major US regional banks are trading on a 30% premium to European equivalents.
More generally, in the past five years we have seen the creation of the United States of Europe, with a few dominant players now moving beyond their regional market such as BNP Paribas and Société Générale.
Why are you so underweight in the US?
We still think the dollar has potential to weaken and all our strategy is based in sterling.
Can you explain how you divide your fund in terms of sectors and risk profile?
We are trying not to have more than 15% in emerging markets or in property and at least 75% in the US, Europe or Japan.
How is the growth in private equity assets driving your investments?
We think liquidity is very good. In 2006, private equity groups raised around $400bn and they have already raised $50bn in January and February this year.
We think this money will primarily go to financials. Last year, it was the second biggest receiver of private equity money after energy and power.
Over the past year, Marfin Popular Bank has contributed 4% to your portfolio's performance, almost 3% more than any other holding. How did you pick the stock originally?
I actually started to buy it around two years ago. It offered brokerage services to ship owners as well as investment banking and brokerage to the Greek market. A significant stake of Marfin Financial was owned by Andreas Vgenopoulos, who came to London and put forward a strategy to acquire and consolidate some second-tier banks in Greece that were trading at a discount. By raising money, he would do enough acquisitions to consolidate and create a bank that could compete with the top tier. The share price has increased since then by around four or five times.
Is it common for you to decide holdings around an individual or leader's vision for a company?
No. The Marfin holding and the holding in Tour Eiffel, for example, are special situations. In total, such holdings take up about 10% of the fund.
In 2006, you reduced your significant weighting in Turkish stocks but held on to Turkiye Garanti Bankasi, which led to 0.52% being knocked off the portfolio. What did you see about the Turkish market in particular and why did you hold on to TGB?
We thought Turkey would go through a number of triggers and newsflow, such as its accession to the EU, falling interest rates and increasing consumer spending that would drive up share prices. We went into names trading on P/E ratios of five, six and seven times.
Early last year we saw some deterioration in liquidity flows into Turkey and the emerging markets generally. We could have been more aggressive in pulling out our assets.
All markets with a current account deficit, including Turkey, saw their currencies collapse for several months.