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the credit risk of the loans held by the major banks in the fund ’ s portfolio .
“ There is strong evidence to believe that the credit risk in the major banks that we own is completely manageable and is anticipated , and that a disproportionate amount of credit risk is dispersed in other parts of both the banking and financial sector — partly in smaller banks with a disproportionate share of commercial real estate , and partly in things like credit funds and pension funds and life insurance companies where I think there will be significant losses ,” he says .
Beyond that , though , he ’ s worried about heightened regulation in the wake of the recent regional bank failures and
Art Of The Specific
Davis likes to say that investing is the art of the specific , and he believes that ’ s especially true in financial services , where there can be a significant dispersion of returns over time among the different players . That ’ s why he focuses on those larger banks that he thinks have durable competitive advantages derived from their level of technology spending , coupled with their financial heft to better handle compliance costs . He posits that these bellwether banks also enjoy better diversified asset and funding bases , higher capital ratios , and better accounting standards .
“ Those fundamentals , combined with banks trading at the largest discount we ’ ve ever seen relative to the S & P 500 , is what specifically draws us to banking ,” he says .
The Financial Fund is sprinkled with what Davis calls “ national champion banks ” in stable countries where he and Crosbie are comfortable investing in the currency and in the local economy . “ Many of these banks have yields above 5 % and capital ratios that are among the highest in the world ,” Davis says .
He points specifically to Singapore ’ s DBS Group Holdings , Denmark ’ s Danske Bank and Norway ’ s DNB Bank .
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Davis likes to say that investing is the art of the specific , and he believes that ’ s especially true in financial services , where there can be a significant dispersion of returns over time among the different players .
believes there could be political hay to make by lawmakers bashing banks in general — even those institutions with their houses in order . “ What I hear in the media is , ‘ Why are we bailing out banks again ?’” Davis says . “ There ’ s a general anger [ toward banks ] that ’ s totally unfair and irrational . But that doesn ’ t mean there won ’ t be consequences to it . I can imagine a putative regulatory environment even to those companies that behaved very well in this environment .”
“ And we own Swiss bank Julius Baer . These are good holdings to have when we think of generational wealth building in a financial services fund ,” he says .
The fund ’ s recent top holding was Capital One Financial Group , which Davis calls the most successful fintech company ever . “ Nobody describes it that way , but Capital One was founded to use data science to disrupt one of the most lucrative aspects of financial services , which was credit cards ,” he says . “ They had no branches or brand name . They just used a bunch of data science to target offers to individual customers in an industry where it had been one size fits all .”
Davis believes banks have suffered an unfair bad reputation through the decades . While he says he ’ s not an apologist for the industry , he is a big believer in the large , well-funded banks that make it into his fund ’ s portfolio and suggests that these types of companies are poised to survive whatever potential economic downturn comes our way and that investors will eventually reward them with higher multiples .
48 | FINANCIAL ADVISOR MAGAZINE | JULY / AUGUST 2023 WWW . FA-MAG . COM