1st September 2014
Influential fund manager Neil Woodford has revealed he is selling out of HSBC because of the “unquantifiable” risk of regulatory fines.
He believes regulators are setting fines according to banks’ ability to pay rather than the severity of their transgressions and therefore is concerned that HSBC could be in the firing line due to the fact it is so well-capitalised.
HSBC was fined $1.9 billion (£1.14 billion) in 2012 for failing to prevent Mexican drug cartels laundering money through its bank accounts, while Bank of America last month paid $16.7 billion (£10 billion) to close investigations into its mortgage sales in the run up to the financial crisis. This amounts to the largest single federal settlement in US corporate history.
Woodford says he reintroduced HSBC into his portfolios last May and included it in the CF Woodford Equity Income fund at launch, but he is now worried about the prospect of “fine inflation” as global regulators investigate malpractice that has occurred since the credit crunch.
Woodford ran Invesco Perpetual’s High Income fund for 25 years, but left in April to set up a venture in his own name, the CF Woodford Equity Income fund. He is one of the best-performing UK managers and during his time at the helm of Invesco’s High Income fund, turned an investment of £10,000 into £230,000.
He says: “Clearly, banks have attracted many fines in the post-financial crisis world as regulators and policy-makers have cracked down on past and ongoing wrongdoings in the industry. The size of the fines, however, appears to be increasing.”
Woodford says that the ongoing investigation into Libor and foreign exchange market manipulation could expose HSBC to heavy financial penalties.
“Not only are these potentially serious offences in the eyes of the regulator, but HSBC is very able to pay a substantial fine. The size of any potential fine is unquantifiable, so this represents an unquantifiable risk,” he says.
As such, these could hinder the bank’s ability to pay dividends, according to Woodford.
He explains: “I’m not suggesting that HSBC is a bad investment but in the light of this growing risk, I now view the shares as broadly fair value.”
Woodford says he will instead focus the portfolio towards stocks that he believes are significantly below fair value such as AstraZeneca, BAE Systems, Drax, Legal & General.