This fund manager has never owned a bank stock — and reveals what he looks for instead
Investors have fled bank stocks in droves since a crisis in the sector broke out earlier this month. The collapse of Silicon Valley Bank and Signature Bank in the United States, as well as the UBS rescue of Credit Suisse , exposed cracks in what has long been described by regulators as a resilient and well-capitalized global banking system. The SPDR S & P Regional Bank ETF (KRE ) slid 14% last week, although it has recouped some losses, up 6% so far week-to-date. Fund manager Ian Mortimer is not a fan — and said he has never owned a banking stock in any of his funds. Mortimer, who manages the dividend-focused Guinness Global Equity Income Fund, told CNBC Pro Talks on Wednesday , that’s because the sector does not fulfill his criteria for picking dividend-yielding stocks. Not all are created equal Not all dividend-paying companies are created equally, according to Mortimer. “Companies that pay a flat dividend tend to do about the same as the market. Companies that cut their dividends over a period tend to underperform quite significantly.” His strategy? Pick stocks with sustainable and growing dividends. “It is the subgroup of companies that manage to successfully pay and grow their dividends over time that drives the outperformance in practice. That’s where we are trying to position ourselves as the standard bearer for the fund — to buy companies that have sustainable and growing dividends,” he added. However, Mortimer is not fond of the dividend aristocrats — a select group of stocks on the S & P 500 that have increased their dividends in each of the past 25 years at least. “They are a helpful guide, but they do not correlate that highly with dividend growth,” he said of the popular investing strategy. Instead, the metrics that correlate most highly with significant dividend growth and dividend safety are return on capital, balance sheet strength, and the “size of the starting dividend year,” according to Mortimer. “So that’s our starting point: persistently higher return on capital businesses which are not overly leveraged. If you think about that as your starting point, the vast majority in the banking sector do not pass those criteria,” he said. Why he shuns banks Mortimer noted that banks tend to have a more cyclical return on capital and have inherent leverage within their business model. “The banking sector has been an area that often pays quite high dividends — sort of attractive from that perspective. However, the capital growth has not necessarily followed that,” he said. “And the second thing is the sort of dividend volatility from that sector is quite high. So, it’s a … theory that in distress, the banking sector will reduce or potentially cancel their dividends,” Mortimer added. He also called banks “quite opaque,” requiring proper balance sheet analysis, compared to other more straightforward sectors such as consumer staples. — CNBC’s Weizhen Tan contributed to reporting
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