Pzena Investment Management is pleased to introduce a new investment strategy, the Financial Opportunities Service. Developed in response to client interest in a concentrated portfolio that would capitalize on the extraordinary valuations currently available in the financial sector, the Financial Opportunities Service comprises approximately 8-20 global financial stocks, reflecting the full research and analysis resources of the firm.
Financial Stocks Are Extremely Cheap
In brief, the subprime mortgage and liquidity crisis has sent investors into panic mode about financial stocks, driving their prices far below their underlying value. Major firms with strong franchises have fallen precipitously, despite their historical records.
The Current Opportunity: Commodity Stocks vs. Financials
A bubble not unlike that seen with internet stocks in the late 1990s has formed, with energy, commodities, and industrial cyclicals being bid up with little regard to earnings. Indeed, the spread in valuations between commodity and financial stocks is wider than at any time in the past 55 years, and financials represent one of the most compelling investment opportunities we have ever seen.
Will History Repeat Itself?
In fact, the current situation in financials echoes the previous crisis in the early 1990s, when fears of inflation and the savings & loan crisis drove the market to embrace energy and technology stocks and punish financials. The financial sector seriously underperformed the market for a year, hitting bottom in October 1990. Once the recession was under way and investors began to pay attention to valuations, the sector dramatically outperformed for several years. From the October 1990 trough through the September 1993 peak, financials beat the market by more than 100 percentage points. What’s striking is that relative valuations at the trough for that period are almost identical to the current period: financials traded at about half that of the market in 1990 and at the end of June 2008. Will history repeat itself? The market is unpredictable and there are no guarantees, but the numbers tell a compelling story.
Of course, the Firm’s research on this topic is more extensive than what is shown here. Additional details can be seen in the Commentary from our Second-Quarter 2008 Newsletter and Forbes’ feature interview with Rich Pzena.
The Financial Opportunities Service is now up and running, and open to new clients. For more details, please call us.
Disclosures
The information discussed herein was selected for inclusion based on its ability to help you better understand our investment model for this particular product strategy. The specific portfolio securities (if any) discussed herein do not represent all of the securities purchased or sold or recommended for our client accounts during a particular period, and it should not be assumed that investments in such securities were or will be profitable. Holdings will vary among client accounts as a result of different product strategies having been selected thereby. Holdings also may vary among client accounts as a result of opening dates, cash flows, tax strategies, etc. There is no assurance that any securities discussed herein remain in a portfolio at the time you read this description or that securities sold have not been repurchased. Any securities discussed do not represent an account’s entire portfolio and in the aggregate may represent only a small percentage of an account’s portfolio holdings.