Scottish Investment Trust (SIT) manager John Kennedy is starting to increase his holdings in financial stocks such as Barclays, even though selling them helped him to outperform key market indices this year.
The company's results for the year to October 31, published yesterday, show that Kennedy produced a 17.1% return on net asset value for the trust, ahead of both world and UK stock markets.
He made a key move in selling about £88m of financial holdings in the course of the year. In October last year, Kennedy had around a third of assets in financials, with Barclays his largest holding, but between December and June he trimmed this down to 20.7%, accelerating the sell-off as the market started to look rockier.
"We cannot claim to have anticipated what was coming entirely but we did think that conditions for investment banks couldn't have got any better," he said.
Financials have since plummeted in value as investors worried about the impact of soaring defaults on sub-prime mortgages in the United States.
However, Kennedy reckons the sell-off could have gone too far and has started buying more of the banks he considers most diversified such as Barclays, which has crept back up to 1.2% of the portfolio.
He also likes the banks' high yield and believes that dividend pay-outs will remain stable.
"We might find that financials are a recovery area in 12 months. It could be 18 months," he said.
Kennedy is also hanging on to a large stake in Scottish & Newcastle. Around 2.3% of the trust's £857m of assets is invested in the Edinburgh company, which is holding off a takeover bid from continental brewers Heineken and Carlsberg.
Kennedy would not be drawn on whether he thinks S&N is likely to remain independent, but he said: "They should get a good price if that is the way the whole thing pans out."
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