Market sentiment may be extremely negative toward European and U.S. financial-services stocks, but Chris Wain-Lowe believes the malaise could lift by year's end. Currently, investors are apprehensive about financial-services regulatory reforms that are being introduced. There are also worries about sovereign debt and the impact of austerity measures brought in by countries such as the United Kingdom and Germany.
"All the regulatory issues should be out in the open, and people can do their numbers and recognize where the trajectory of growth will come from," says Wain-Lowe, 52, co-manager of AIC Global Advantage.
"As far as the sovereign-debt issue is concerned, markets will want to see the austerity measures enacted," says Wain-Lowe, who is executive vice-president, at Burlington, Ont.-based Portland Investment Counsel Inc. "That won't necessarily come before the end of the year. But for sure, next year, we are more optimistic that markets will adopt a more rational approach to valuing these businesses."
A bottom-up value investor, who shares duties with senior vice-president Greg Placidi, Wain-Lowe uses a proprietary model to select about 40 stocks that are cheap on a price-to-book-value basis. He relies on inputs such as return on equity, loss reserves and net-interest margins to come up with the stock's price-to-book-value ratio, and compares his valuation to what the stock is fetching.
A case in point is Barclays PLC. The global bank made a splash in September 2008 when it acquired the bankrupt Lehman Brothers' North American trading assets and its Times Square head office, for about one billion pounds.
Barclays is now trading slightly below book value, partly because Lehman's creditors have launched lawsuits to get more money from the insolvency. While Wain-Lowe is confident the matter will be laid to rest, he also believes that the acquisition was "the single largest and most attractive purchase that came out of the credit crisis. Barclays has gone from being in the top 10 or 15, to the top five investment banks."
A long-time holding, the once high-flying Barclays crashed to £0.50 during the financial crisis. Currently, at £2.80, it is still a cheap stock. "It should be considerably higher, if markets were judging things more rationally," says Wain-Lowe. Given a more normal environment in two or three years, Barclays could trade at twice its book value, or around £6.00, he adds.
A native of Liverpool, England, Wain-Lowe has been a banker for the better part of his career. After graduating in 1981 with a BA from the University of North Wales, he joined Barclays' accelerated graduate-training program. This culminated in a management posting in Hong Kong, where he was on the investment-banking team. Two years later, he returned to London and worked on the privatization of UK water and electricity utilities.
Between 1991 and 1994, Wain-Lowe was in Greece as the chief executive general manager. Then he spent two years in London as head of Barclays' career-development program. That was followed by a three-year stint as Barclays' chief executive in Botswana.
Wain-Lowe left Barclays and moved to Jamaica, where he was recruited to find a buyer for the government-owned National Commercial Bank. That individual happened to be Michael Lee-Chin, who headed AIC Ltd. and eventually made an offer that brought Wain-Lowe and his family to Canada in 2002.
Along with Placidi, Wain-Lowe assumed management of AIC Global Advantage in March 2003, as well as AIC American Advantage and later AIC Global Wealth Management. They also manage nine closed-end funds, of which seven are focused on financial-services stocks. Following the sale of AIC to Manulife Financial Corp. in 2009, they stayed on under Portland Investment Counsel, formerly AIC Investment Services Inc., which became the sub-advisor to the three funds.
The financial-services sector has been plagued by intense volatility, and these market trends are reflected in the severe losses sustained by AIC Global Advantage, followed by a more recent rebound.
The fund lost 57.4% in 2008, worse than the 42.6% loss for the median fund in the Financial Services Equity category. In 2007, the fund lost 23.5%, lagging the median loss of 16%.
In 2009, the fund returned 29.9%, very close to the 30.4% median return. But this hasn't made up for the earlier losses, and the fund has suffered heavy redemptions. AIC Global Advantage has $24.8 million in assets at the end of May, down sharply from $324 million in 2001.
Nevertheless, Wain-Lowe is maintaining faith in the sector, while also protecting the fund through currency hedging and holding about one-quarter of the portfolio in so-called financial-infrastructure names.
One example is Visa Inc. V. The world's largest credit-card company saw transactions increase during the financial crisis, thanks to growing debit card usage. "The underlying business model was very resilient."
Looking ahead, Wain-Lowe argues that the global economy will have been rebalanced in the next two or three years, as some Asian countries become richer. "As long as the growth comes back into economies," he says, "then financial-service companies are leveraged to growing economies."
