The funds, investment trusts and ETFs most exposed to bank shares

Financial shares are under pressure as investors assess the fallout from the collapse of Silicon Valley Bank and Credit Suisse. 

Banks are once again a source of fragility in the global economy, as rapidly rising interest rates wipe out the value of their bond portfolios if they have not taken the right risk management measures, and savers pull deposits in search of higher yields elsewhere.

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The high-profile collapses of Credit Suisse (SIX:CSGN) and Silicon Valley Bank sparked an investor retreat from other banking shares. The MSCI World Financials Sector index has fallen around 10% in a month, while FTSE 100 banks Barclays, HSBC, Standard Chartered , Lloyds and NatWest also dropped by double-digits in the aftermath of the news, before rebounding.

While the consensus among investors is that bank issues are confined to just a handful of companies, rather than something that will spread to the entire banking system, there is no guarantee that they are correct. At the start of the year, no one was warning about fragility at any bank, and so there could be more cracks under the surface yet to be exposed.

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Interactive investor looked at the UK and global funds, investment trusts and exchange-traded funds (ETFs) that are most vulnerable if there were to be more issues at banks and other financial stocks. We used data from Morningstar, the fund information website, to track a portfolio's weighting to the "financials" sector. 

Funds

Global and UK funds with a value investment style were most likely to hold bank shares, according to data firm Morningstar as of the end of March 2023. Artemis’s SmartGARP strategies, which use an algorithm to find undervalued but growing companies, are particularly concentrated in the financials sector.

This includes Super 60-rated Artemis SmartGARP Global Equity (33% in financials), as well as Artemis SmartGARP UK Equity (43%) and Artemis SmartGARP Paris-Aligned Global Equity (38%).

The Artemis UK Select fund is also concentrated in financials, at 35% of the portfolio, while GVQ, another value investor, has two funds on the top-10 list.

Other popular funds heavily invested in bank , financials and insurance companies include: Ninety One Global Sustainable Equity (30%), Man GLG Undervalued Assets (28%) and Royal London Sustainable Leaders Trust (25%).

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Bank shares tend to yield more than the market and are typically cheap relative to their earnings. They also stand to make more money due to higher interest rates, as the gap between what they offer customers in savings accounts compared with what they can make by investing money is greater.

Funds with minimal exposure to financials include Fundsmith Equity (5.6%), Baillie Gifford Global Discovery (6%), Marlborough Special Situations Fund (7%), Liontrust UK Growth (4%), as well as numerous thematic funds that just pick stocks that fit a certain investment theme, such as healthcare or artificial intelligence.

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Last month, Fundsmith Equity manager Terry Smith penned an opinion piece for the Financial Times explaining why he never invests in bank companies. One of his key reasons was that they use gearing (leverage) to increase the value of their assets compared with the value of their deposits. He also said that bank runs are possible and healthy banks can be brought down by their more risk-hungry peers. The 5.6% weighting in Smith's portfolio comes from payments processor Visa, rather than a banking or insurance stock. 

In addition, to the UK and global funds listed in the table below, there are a small number of funds that specialise in the financials sector, including Jupiter Global Financial Innovation, which lost 10.7% last month.

Open-ended funds invested in financials

Source: Morningstar, March 2023.

Investment trusts

One investment trust stands out as being exposed to financials: Polar Capital Global Financials. It exclusively invests in the finance sector, and includes JPMorgan Chase & Co (NYSE:JPM), Bank of America (NYSE:BAC) and HSBC (LSE:HSBA) in its largest positions.

Managers Nick Brind, John Yakas and George Barrow are not worried about bank fragility in California and Switzerland spreading to other firms in the sector. They say investors in banks can reduce risk when investing in banking shares by being prudent about the types of companies they invest in.

Brind, speaking on interactive investor’s On The Money podcast, called the recent turmoil a “mini banking crisis” rather than it being the makings of a systemic bank crisis.

He said: “Ultimately, we know the reasons why those (US) banks were seen as susceptible, but the weakness with all of them was that they had a high percentage of their depositors uninsured.

“This was much higher than their competitors and peers. Consequently, they were susceptible to that loss of confidence. So in that sense, it is not a systemic banking crisis.”

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Next on the table is Lindsell Train investment trust. It has a large allocation to financials due to its 41% position in its own fund manager Lindsell Train Limited, while Lowland takes a value investment approach, which has led it to the banking sector on valuation grounds.

Also in the table is abrdn Equity Income Trust. This focuses on buying high-yielding UK shares, and therefore banks and insurance companies are appealing to manager Thomas Moore. Elsewhere, emerging market trusts have large allocations to the financials sector, including India and Vietnam specialists, as well BlackRock Frontiers and Barings Emerging EMEA Opportunities.

Popular global and UK trusts that have very limited allocations to financials include: Scottish Mortgage (1%), Capital Gearing (1%) and Mid Wynd International (12%), and BlackRock Throgmorton Trust (14%).

Source: Morningstar, March 2023.

ETFs

A number of exchange-traded funds offer investors access to the “theme” of financials. These include the SPDR MSCI World Financial ETF, which charges 0.3%, and the Xtrackers MSCI World Financials ETF, which costs 0.25%.

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The SPDR MSCI World Financial Ucits ETF has three of the four big US banks among its top holdings: JP Morgan Chase & Co, Bank of America and Wells Fargo. Also in the top 10 are HSBC, Royal Bank of Canada and Toronto-Dominion Bank.

The Xtrackers MSCI World Financials ETF has four banks in its top five holdings: JPMorgan Chase & Co, Bank of America, Wells Fargo and HSBC.