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ANALYSIS: Anti-us bias boosts new star fund.

Fund Strategy August 14, 2006 Guy de Blonay’s New Star Global Financials has no big US names – it has a European focus and its biggest holding is an Italian bank – but it has outperformed by 150% over the past two years.

Imagine you were putting together a global financials fund. It would probably have the core blue-chips such as Citibank and HSBC, plus a smattering of emerging market Brazilian or Eastern European plays.

But when you look through New Star Global Financials, you cannot find a single US financial institution you have heard of. It has got more Belgian holdings than investments in the world’s biggest economy. Its biggest holding is an Italian bank, Unicredito, and it numbers among its top 10 stocks the intriguingly-named Societe de la Tour Eiffel.

Has its manager, the Swiss-born Guy de Blonay, gone mad or does he know something the rest of us do not? The latter is (probably) the case. The #153m fund is up 23.7% over the past year and 119.3% ahead over three years. Its sector ranking is pretty meaningless – it is in the “specialist” sector – but it has comfortably beaten its benchmark.

It is doing slightly better than its biggest competitor – the longer- established #880m Jupiter Financial Opportunities fund – and is a long way ahead of the performance of Axa Framlington’s #100m Financial fund, which is up only 9.6% over the year and 49.9% over three years.

What marks out the New Star and Jupiter funds is their distinct bias against America in favour of central European and Scandinavian stocks. Meanwhile, Axa Framlington is stuffed with the HSBCs and Citibanks of this world. website citibanks ignon

Not that de Blonay does not have his fair share of mishaps. The second quarter has not been particularly kind to the fund, a fact he readily admits. “The past two months the fund has underperformed its benchmark. But that was after outperforming by 150% over the past two years,” he says.

Part of the reason for the recent underperformance was his exposure to emerging market stocks during the May downturn, and how the market is huddling in big-cap, highly liquid stocks, many of which are American.

Not that he is about to ditch his bias against American financials. He reckons the dollar needs to fall another 10% and says there should be much greater clarity about interest rates falls during 2007 before he will reverse his bias.

And what a bias it is. As he says: “The top five global financials are all US. I don’t hold any of them. So it is quite a large bet. We focus our energy on where there is a dynamic and ignore those parts of the world where we can’t see the prospects for a re-rating. For that reason we have avoided Japan [where the re-rating is over] and the US.” What he does love are Continental European banks. “I like European banks because they are cheap,” he says. “UK banks are cheaper on the 2006 numbers, and even cheaper on next year’s earnings forecasts. But it is quite clear the market does not believe these forecasts. Everybody thought that rate rises had already topped out and were surprised to see the central bank raise rates again. HSBC and others are saying that debt quality is stabilising, but the words are vague. In a rising interest rate environment, and with rising unemployment, it is not clear why that should be the case.” Continental banks are more attractive because they are going through a sustained consolidation period. “We will see a similar scenario to what happened to US regional banks, which will result in a re-rating of the sector,” de Blonay says. “In Italy you have a country with an inefficient market that is craving consolidation and the release of hidden value. Unicredito will be the main consolidator and is also going to be a big investor, positioning itself in Eastern Europe and Germany.” I was a touch naive about the scale of European banking consolidation. I was of the belief that only Britain had truly dropped its borders and allowed transnational banking takeovers – for example, Abbey/Santander – but the truth is that other, supposedly protectionist, European countries have been doing the same. Witness deals such as Unicredito’s takeover of Germany’s HypoVereinsbank and Bank Austria, BNP Paribas’s acquisition of Italy’s BNL and Credit Agricole’s purchase of a Greek bank. go to site citibanks ignon

“Two years ago you could not enter the Italian banking market. Now it is open to offers,” says de Blonay You cannot say a bad word about Unicredito in his presence. The bank is his largest holding, at 6.3% of the fund, and it has performed nicely over the past year. It is up 30% in sterling terms over the past 12 months, strongly outperforming the Milan market.

“It is still yielding 5% on next year’s earnings forecasts, has a p/e [price-earnings ratio] of nine and is growing earnings at 20% a year,” de Blonay enthuses. “It is also a mortgage bank in an underdeveloped market. Through Unicredito you can play European consolidation, Eastern Europe, German recovery and Italian mortgages. It has got huge potential in all areas.” But it would be wrong to characterise New Star Global Financial as solely focused on this regional theme. De Blonay is keen to underline how it is not a specialist area – after all, financials make up 35% of the global market cap – and there are several non-correlated sub- sectors that give the fund much-needed diversity.

He quite likes property, and has stretched the definition of financials to include it in his fund. That is where the Tour Eiffel comes in. No, he does not own a few decks of the most famous landmark in Paris but a property company focused on real estate on the edge of the city. It used to run the Eiffel Tower, but that was taken over by the government years ago, and now it is run by what de Blonay describes as “two of the shrewdest property experts in France”. Since he bought the stock in July 2004 it has soared from #30 to #69 a share.

More recently he has been building a stake in Acumma group in Britain. It is a group like Debt Free Direct, specialising in Individual Voluntary Arrangements, those pseudo-bankruptcy deals that are the bane of the big high street banks. I believe that IVAs are going to rip through British retail bank profits in the next few years. What is interesting is how this fund can invest in banks – as well as the companies that are going to cannibalise them over the next few years.

PATRICK COLLINSON The Guardian Personal Finance Editor