The stock in question is Standard Chartered.
Costar remarked, ‘This has…all of the hallmarks of what we look for in an undiscovered growth situation, even if it just happens to be a FTSE 100 stock. It is priced for its recent history, rather than its future. Its core business is stronger and higher quality than the market is giving it credit for. It has been refocusing its activities back to where it has a sustainable competitive advantage whilst at the same time investing for future growth. And it is cheap both relative to its potential returns, the market and its peer group.’
The company has been in the wars in recent years. Costar commented, ‘Under previous management, the company had a highly imprudent obsession with delivering top-line growth. This was pursued with an almost flagrant disregard for quality, risk or where we were in the cycle; risk controls were below par and investment in the core business was neglected. Cue car crash, management change, substantial recapitalisation and a clear-out of the skeletons in the cupboard. Now the dust has settled, a more rational analysis can prevail, but prejudices and muscle memory create an imbued investor stubbornness and hence the potential opportunity.’
Costar continued, ‘Winters (the new CEO) and his team have transformed the potential. They have or are pulling out of areas where Standard is sub-scale (Korea, Indonesia), while at the same time benefiting from competitor retracement in areas where they remain (e.g. Barclays Africa). They have significantly rebalanced their end exposures (e.g. commodities, unsecured finance) whilst at the same time upped risk weights, loan coverage and bad debt provisions. Finally they have rationalised costs and invested significantly in digital capability, straight-through-processing and regulatory competence. The result is a bank that has enviable franchises (retail, trade finance and wealth management) in areas of highly attractive long-term growth (India, HK/China, Vietnam, selective Africa) that are capable of producing a higher quality, more durable return on equity with significantly better top-line growth prospects than the market is factoring in and for appreciably less risk. Despite this, it trades on material discount to its potential returns (0.7x NAV for a business we believe can achieve a low-teens return on equity) and to its peers (HSBC and emerging market local banks). Given the business is delivering consistently good results, we believe this is a clear anomaly and have positioned the Fund accordingly. ‘
The JO Hambro UK Growth fund has returned 21 per cent over the past year, compared with 17 per cent for the average fund in the IA UK All Companies sector in the same time period.