Best Bank-Stock Allocation Is Zero for This Global Fund Manager

(Bloomberg) -- One of Australia’s top-performing fund managers has turned its back on bank stocks.

“I used to own quite a few banks in our global equity portfolio,” Hamish Douglass, chief investment officer at Magellan Financial Group, said at a conference in Sydney Tuesday. Yet now, despite cheap valuations, “we don’t own a single bank. We cannot find a bank anywhere on the planet that we want to invest in,” he said.

While banks might not be “terrible” businesses, they’ll suffer if interest rates get further compressed in the next cycle, Douglass said. And over the longer term, disruptions from fintech and open-banking initiatives pose a threat to their deposit-taking franchises, he said. Businesses that will win the future are those that are “capital lite,” he said.

Magellan, which manages more than A$92 billion ($63 billion) in global equity and infrastructure assets, is looking for companies that could grow 6% to 8% over the next 10 to 20 years, Douglass said. He conceded they were “very, very hard to find.”

“Modest growth is the most valuable thing to hedge yourself,” he said at an event organized by Livewire, an online platform that publishes fund manager insights. Magellan moved out of defensive positions at the beginning of this year, he said. “The ideal portfolio in our world isn’t equities with low PEs and high free cash flow yields.”

The Sydney-based fund manager is also betting on the increasing affluence of the Chinese consumer. Among Douglass’s top picks is the “dirt cheap” Alibaba Group Holding Ltd. He also likes luxury group LVMH Moet Hennessy Louis Vuitton SE and Estee Lauder Cos. And Magellan is a top-five shareholder in Starbucks Corp., Douglass said.

To contact the reporter on this story: Andreea Papuc in Sydney at apapuc1@bloomberg.net

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Edward Johnson

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