The fund manager told What Investment that the climate of higher inflation will likely mean that bond yields rise.
He takes the view that this will enhance the profitability of the sector, both because banks have a significant slug of their assets held in bonds, and rising yields mean a higher income from those bonds.
In a world of rising interest rates banks also have a greater capacity to charge higher rates of interest to borrowers.
Smith commented that Lloyds Banking Group is well capitalised, that the PPI compensation bills it has faced have started to moderate, while at the sector level, ‘the era of ever increasing regulation seems to be coming to an end.’
He has also started to invest in Barclays, commenting that while the shares have a lower yield than those of Lloyds, it is likely to rise from here, as market conditions improve.
Smith told What Investment that while he is eager to increase his exposure to the banking sector, he was determined not to take on excess risk.
With that in mind, the investor bought into ING, a ‘well capitalised Dutch bank with a strong market position and a big share of its market.’
The largest active position in the trust is Relx, the company formerly known as Reed Elsevier, a media and events company.
Smith noted that the shares have been somewhat out of favour with the market, as the perception is the shares are likely to perform better when inflation is low.
But the fund manager told What Investment that he views the stock as an attractive investment due to the rising dividend yield, at a time when not many companies can achieve a yield rising at that pace.
The £250 million Henderson High Income Investment Trust trades at a premium to net assets of just over 2 per cent.