AN INTERVIEW WITH Mark Bunting ROBERT WESSEL OF WHY 2018-09-15¢  cent decline in the British pound,

  • View
    0

  • Download
    0

Embed Size (px)

Text of AN INTERVIEW WITH Mark Bunting ROBERT WESSEL OF WHY 2018-09-15¢  cent decline in the...

  • MARCH 6, 2017 INVEST LIKE A PRO, WITH THE PROS

    by Mark Bunting, Publisher, Capital Ideas Research

    Canadian investors love their Canadian banks — for good reason.

    In January, 1997, for example, 1,000 TD Bank shares were worth $8,700. Today, those shares have a value of nearly $133,000, including reinvested dividends. A neat return of more than 1,500%.

    But a case can be made for investors to look beyond their own backyard to complement their Canadian bank holdings with banks from other parts of the world that have superior growth and healthy yields. That’s the opinion of Robert Wessel, managing partner of Hamilton Capi- tal, which distributes two ETFs with exposure to global financials.

    !1

    “What you’ve been seeing (for Canadian

    banks) is these two decade cyclical and

    secular trends end, and when they ended you

    got more normal growth which is six per cent. Going from 10 per cent-plus to six is pretty

    darn noteworthy.”

    Robert Wessel, Hamilton Capital

    Mark Bunting Publisher

    COVER STORY

    AN INTERVIEW WITH ROBERT WESSEL OF HAMILTON CAPITAL’S

    OUTPERFORMING GLOBAL BANK ETF

    FROM PEYTO TO JADESTONE: OIL & GAS

    STOCKS WITH BIG UPSIDE POTENTIAL

    ANALYSTS START TO TAKE A SHINE AGAIN TO

    FORMER DARLING AVIGILON CORP.

    WHY RAYMOND JAMES LIKES THE BUSINESS MODEL OF FOUNDERS ADVANTAGE CAPITAL

    CAPITAL IDEAS DIGEST

    The Case for Owning Global Financials How to get growth and yield in the $10 trillion sector

  • MARCH 6, 2017 INVEST LIKE A PRO, WITH THE PROS

    The flagship Hamilton Capital Global Bank ETF (HBG-T) outperformed the Global Bank Index in 2016 by 16% with a 28% total return. Hamilton Capital recently launched the Hamilton Capital Global Financials Yield ETF (HFY- T), which it says offers REIT-like yield with positive interest rate sensitivity.

    Capital Ideas Research interviewed Mr. Wessel about the benefits of investing in global financials, the superior growth of smaller or mid-caps in certain countries, including the U.S., and why REITS could be a risky bet should rates begin to normalize the next few years. He also has a few investment ideas for you.

    Canadian banks return to normal

    In 2011, Mr. Wessel and his team forecast that Canadian banks would see their EPS growth decelerate from low double digits to mid-single digits. That turned out to be accurate. Mr. Wessel believed at the time the big banks would return to normal growth rates after a lengthy period of outperformance.

    “The Canadian banks had 20-plus years of 11 per cent growth. That’s not normal,” Mr. Wes- sel says. “Normal in this GDP environment is six per cent. We’re not being bearish on the Canadian banks. There’s nothing wrong with six. But it is notably lower than the 10 per cent- plus experienced from 1990 to 2010. The problem with the Canadian banks is that anything that’s even seen as marginally negative — because everybody owns so many of them and they have such strong feelings about them — that even benign, anodyne, generic commen- tary that earnings will slow can be seen, quite inaccurately, as being bearish. What you’ve been seeing is these two decade cyclical and secular trends end, and when they ended you got more normal growth which is six per cent. Going from 10 per cent-plus to six is pretty darn noteworthy.”

    Mr. Wessel details the headwinds faced by Canadian banks the last few years.

    “Turbulence in the global markets, slowdown in growth in the Canadian economy — below trend, weaker U.S. economy, a macro economic tailwind that was nowhere near as beneficial to the sector as it used to be, the significant allocation of capital outside of Canada. There was a multitude of factors,” he says.

    Mr. Wessel believes there’s a place for Canadian banks in investors portfolios pointing to their solid franchises, high profitability, and predictable dividends. But he thinks global fi- nancials can be a good complement to the big banks while adding diversification, above average growth and solid yields.

    “I think there are strong reasons, particularly related to taxation, not to sell Canadian banks. But is there a powerful case to add diversification alongside Canadian banks, I think the an- swer to that is very surely yes,” Mr. Wessel says.


    Advantages to investing in global financials

    “The global financial sector is so gigantic — it has a combined market cap of $10 trillion, give or take,” Mr. Wessel says. “There’s hundreds and hundreds and hundreds of financial companies. You just have the ability with a non-passive and active product to more explicitly find growth so we’re able to customize the portfolio, as large as it is, by finding financials that are growing, whether they’re growing because they’re operating in countries, or areas within countries, that are growing faster, or because they have good operational excellence, or, in part, because they’re taking market share. The sector is so massive so we’re able to

    !2

    “I think there are strong reasons,

    particularly related to

    taxation, not to sell Canadian banks. But is

    there a powerful case to add

    diversification

    “The global financial sector is

    so gigantic — it has a combined

    market cap of $10 trillion, give or

    take. There’s hundreds and hundreds of

    financial companies. You

    just have the ability with a

    non-passive and active product to more explicitly find growth.”

  • MARCH 6, 2017 INVEST LIKE A PRO, WITH THE PROS

    pick and choose and come up with a highly liquid portfolio but still have exposure to growth.”

    Another advantage to owning a diversified mix of global financials is that many of the countries in which the companies operate are not always correlated with Western hemisphere banks. It’s one of the reasons Mr. Wessel’s main fund out- performed last year.

    “We had exposure to countries where they were not in the eye of the storm,” Mr. Wessel explains. “We had exposure to Australia, we had exposure to India, so when the world is having big problems for Brexit, Australia is weakening like everybody in the globe, but it’s not having the same impact. In down markets we were able to weather the corrections better because we had 15 countries. Invariably, a large amount of those countries, whenever there’s some sort of global correction, are not in the eye of the storm. By definition you tend to outperform in periods of turbulence because your diversification works to your advantage”

    Big, dumb U.S. banks

    In the U.S., Mr. Wessel has been paring back his bank holdings because of the recent run they’ve had. His main focus is in mid-cap banks and not large caps, in large part because the big four U.S. mega-cap banks are not growing their earnings.

    “Wells Fargo, J.P. Morgan, B of A, and Citigroup are all in year four of zero EPS growth,” Mr. Wessel says. “All of those four mega banks are in all of the relevant indices. Those four banks are huge percentages of almost all passive finan- cials ETFs. They’re huge percentages of every financials index. They’re notable percentages of the S&P 500 and so on. A bank analyst friend of mine refers to them as ‘big, dumb banks’. By just being away from them, we’ve benefited.”

    Mr. Wessel not only shuns the four U.S. mega banks, he’s also generally not invested in the large regional banks a tier below them.

    “There’s the four mega-caps,” Mr. Wessel explains. “Then you’ve got about 10 regionals so there’s 14 banks that really are by far the biggest part of the U.S. banking system, and we generally own none of those. But below that is 200 mid- caps, and below that is another 200 small-caps. If you’re in Canada, you can’t design a portfolio of banks that’s growing faster than the sector because they’re all the sector, where in the U.S., if you have 200 banks to choose from — guess what — you can find a combination of banks that have a good risk/reward that are growing faster.”

    The appeal of U.S. mid-caps

    One of Mr. Wessel’s largest holdings is First Republic Bank (FRC-N) which offers commercial banking and wealth man- agement in select areas of California, Oregon, New York, Connecticut and Florida.

    “We’re looking for areas and companies that are growing faster than their national or regional economy,” he says. “First Republic (FRC-N) is actually a decent sized institution. They do very, very well in the businesses that they target. They’re in good geographies, and they have good demographics in their targeted customer base. They have a wealthi- er clientele. They execute very well — so guess what — because the U.S. is such a big country, they’ve got lots of room to grow.”

    !3

    First Republic Bank (FRC-N) | One year chart

  • MARCH 6, 2017 INVEST LIKE A PRO, WITH THE PROS

    Another stock Mr. Wessel likes is Silicon Valley Bank (SIVB-O), which lends to technology companies, and offers bank- ing to high-net worth individuals. The bank claims on its website that it’s helped fund more than 300 start-ups.

    U.K. and Northern European banks top of the heap

    Overseas, an area of focus for Mr. Wessel are Northern European banks which, owing to their high capital levels, helped to shield his investors last year from some of the turmoil in other parts of Europe.

    “All of