Fund Selector Asia
Described as a ‘graveyard’ for stocks for a decade or so post the Global Financial Crisis, Matt Burdett, manager of the Thornburg Equity Income Builder fund, believes banks and the broader financials sector are once again in an investor sweet spot.
With interest rates unlikely to collapse, Burdett (pictured) says financials now have an element of earnings power which they lacked for most of the post-GFC era, and subsequently the sector is currently the portfolio’s largest allocation.
“For many years, investors avoided banks and other financials, they were basically a graveyard for stocks,” said Burdett. “However, since inflation has resurfaced, earnings power across financials has actually been pretty spectacular.”
On the expectation current global trade tensions are not set to subside anytime soon, Burdett added the supportive inflation dynamics are set to continue, bolstering the case for holding financials.
“There are also many dividend payers within financials, which is why two of the top five holdings in the fund come from the sector,” he added.
The fund’s top financial holding is the US-listed CME Group, which Burdett said enables investors to hedge a wide range of assets, such as rates, equities, and commodities, such as the WTI contract.
“It is a good company to have in a diversified portfolio because when volatility rises, CME’s earnings power increases as investors increasingly hedge,” he said. “Like most US companies, it also has a quarterly pay-out ratio; however, at year-end, excess free cashflow is paid out as a variable dividend.
“When you add this to the regular quarterly payments, the total yield is about 4%, which is compelling in a US context.”
The next largest financials holding is in BNP Paribas, which Burdett said he has liked for a long time for several reasons.
“Its business mix is very diversified, and it trades at a significant discount to other banks, even within Europe,” he said. “It was compounding book value per share even when interest rates were negative.
“While many banks now trade above book values, such as JP Morgan, which is more than two times book, BNP trades at below 80% of book value, while its dividend yield is also in the high single digits.”
Burdett added the self-reliance uplift in Europe, which has already been seen in defence names, is a much broader dynamic.
“One of the best ways to support this is to develop deeper European capital markets, which still significantly lag the depth of US capital markets,” he said.
“Given BNP already operates across the capital markets spectrum, it would be a significant beneficiary if this were to increase.
“I am not saying this will happen overnight, but the smoke signals are clear on what needs to happen in Europe.”
This article first appeared in our sister publication, Portfolio Adviser.

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