Enter the matrix...how Ben takes the emotion out of stock-picking

THE quarter point rise in the Bank of England base rate ten days ago may have borrowers worrying about the extra squeeze on their finances. But their pain is the banking sector’s gain.

Banks are now able to extract a bigger slice between the cash they take in as deposits and the money lent to borrowers, especially if they continue the widespread practice of failing to pass on the rate increase to already squeezed savers.

With more rate hikes on the horizon, some experts are predicting this will stimulate the profits and share prices of banks – and reward investors who have waited patiently for them to lurch back into favour following the financial crisis.

Such rewards could be awaiting Ben Whitmore, fund manager of Jupiter UK Special Situations, who holds about a quarter of his fund’s portfolio in banks and other financial groups.

Whitmore, who hunts down good value shares rather than picking a favourite sector, prefers not to make forecasts based on political or economic events. But he accepts his fund might reap some rewards. He says: ‘Financial companies, especially banks, would benefit from gradual rises in interest rates.’

Whitmore prefers to analyse individual companies to understand where their current earnings sit compared to the past.

He says: ‘We recently invested in Barclays. Its shares trade on a significant discount to its book value due to uncertainty over the strategy. On several measures, it is on just half the rating of HSBC. This seems too low.’

Casting off shares that have done their bit is equally important. He sold aerospace company BAE Systems recently because ‘the shares have been performing strongly and no longer offer much value’. Even when a share consistently fails to perform he will continue to hold out for improvements. One such is education group Pearson that he has held for several years. He says: ‘This has not been a successful investment to date. But we do believe it has a lot of value at its current depressed levels.’

Whitmore and his team select shares without emotion as this is ‘the biggest inhibitor of returns’. Instead they use two screening measures: the Graham & Dodd matrix to find low valued stocks based on their average earnings over a period of ten years; and the Greenblatt, which pinpoints companies that combine low valuation and a high return on their revenue generating assets.

He says: ‘The screening systems iron out biases by forcing us to look at lowly valued companies. Humans do not like going against the crowd – the screens force us to.’

Although he does not favour particular sectors as such, the screening systems inevitably allow sector groupings to emerge. As well as banks, they have thrown up food retailing, mining and energy as bargain sectors. Whitmore adds: ‘Whilst these offer the lowest valuation at sector level, portfolio diversification is critical.’ Patrick Connolly, of financial adviser Chase de Vere, likes the manager and the fund, despite the fact it has languished in the bottom quarter of its fund sector over the past year.

He says: ‘Special situations funds typically have periods when they perform well and others when they perform poorly. They often invest in value stocks which are out of favour and until these stocks recover many of these funds can be expected to lag.’

He expects performance to improve, although cautions investors to be patient.