As with other sectors investors can make money investing in banks, but we believe the risks usually outweigh the potential returns.
However, our main reason for avoiding the sector in our portfolios today is down to the commoditisation of the industry and lack of long-term pricing power. How many bank cards do you have in your wallet (physically or virtually) right now? In the UK for example, competitive behaviour is probably turning your local bank branch into a pet grooming salon or a coffee shop as digital-only banks take share from the household names that have legacy infrastructure.
While technological leadership could also give a bank material cost advantages and better user experiences — resulting in higher returns — we see the sector as a whole as a long-term, low-return industry full of competitive threats and rising regulations.
In conclusion, we want to focus on companies that can provide attractive returns above the cost of capital over the long term. It is true that at times of the economic cycle being underweight banks can hurt performance of a fund or portfolio. Over the long run, however, we are quite convinced that the competitive pressures, increasing regulation and pricing transparency will result in an industry where returns are likely to revert to the cost of capital or below.
Please note: Stock examples are for illustrative purposes only and are not a recommendation to buy or sell.
The value of active minds: independent thinking
A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.