Our process starts with sector selection.  We have not chosen to specialise in the financials sector by chance.  We have done so after careful consideration. Historically, the financials sector and, in particular, the banking sector has been one of the best performing sectors in the stock market (as at 31st Dec 2006). 

Index Name	Region	Financial sector’s ranking	Time since inception of index
Russell 3000 Index	US	1/12	12 years
FTSE All Share Index	UK	3/34	21 years
Bloomberg European 500 Index	European	5/37	10 years

All figures are calculated from simple price appreciation.
Source: Bloomberg.

This has occurred due to the central and crucial role that banks play in free market economies, a role that we believe will ensure the prosperity of the banking sector as a whole over time. Money transmission is perhaps the single most important function performed in any free market economy and it is the banks dominance of this function that gives them tremendous economic muscle.  Without banks and the money transmission services they provide, free market economies, as we know them, could not function.  Few other sectors of the stock market are blessed with such an advantageous economic characteristic.  Most sectors see their profitability rise and fall over time as their economic lifecycles run their courses, for example, ship building, shipping, textiles, coal production, engineering and so on.  However, it is our belief that the banking sector's economic lifecycle and high level of profitability is more enduring and ensured by its unique place in the economy.  Banks endure while others come and go. No matter what sector of the economy is at the peak of its economic cycle and generating the highest returns on capital it needs the banks to transact its business.  The banking sector is to all intents and purposes blessed with economic immortality. 

 

It is our opinion that the long term profitability of the banking sector is ensured not just by its critical role in the free market but also by other virtuous economic factors. Banks have been major beneficiaries of new technologies which have allowed them to dramatically cut their operating costs while improving their capital and risk management. Banks have also been busy buying up their competitors to obtain economies of scale, reduce competition and enhance their power to set prices all of which further enhances their long term profitability.  If you understand the unique and commercially advantageous position that banks are in and the economic forces that will inevitably lead to further consolidation of the World's banking and financials markets, then you will understand not only why banks have performed so well in the past but also why we believe they are also likely to continue to be amongst the best performing sectors in the future.

 

We believe that the financial sector, and in particular the banking sector, will prosper over time and our investment process has been designed to identify better performing markets and stocks, however investors should be aware that the sector performance and the performance of individual stocks is not guaranteed and investment values may fall as well as rise.