Standard Chartered PLC (LSE: STAN) is not everyone’s cup of tea. The bank’s shares have fallen 32% over the past twelve months as concerns about the group’s capital position and falling profitability have weighed on sentiment. Many analysts, including myself are also concerned about Standard’s exposure to the commodities sector.
However, one of the world’s oldest, and most respected, funds has been building a position in the bank, as the fund’s managers believe that Standard is undervalued.
Rich history
Tweedy, Browne Partners has been in business for over 90 years and currently manages around $21.4bn for investors. The same group of fund managers and directors has run the group since its inception. No managing director or former general partner has ever left Tweedy, Browne to join another investment firm, and there have only ever been eleven principals, four of whom are currently active.
Using a value-orientated approach, the fund’s managers have been able to outperform the market by a high double-digit percentage for decades and the group started buying Standard during the first quarter of 2014. Since then, the fund manager has continued to add to its Standard position and it is now the fund’s largest position.
Plenty to like
So what does Tweedy, Browne Partners like about Standard?
Well, firstly the fund’s analysts love the bank’s low valuation. At present the bank is trading at a forward P/E of 7.9 for 2015, falling to 7.3 for 2016, making it one of the cheapest banks in the banking sector. Tweedy’s analysts also like Standard’s dividend yield — the bank’s shares currently support a yield of 6.3%.
It’s not just Standard’s valuation that’s getting Tweedy fired up. The fund also likes the state of Standard’s loan book and mortgage portfolio. The bulk of Standard’s operating income is derived from wholesale activities such as corporate finance and trade finance.
Additionally, Standard has a sizeable mortgage portfolio that is well secured by a loan-to-value ratio on its mortgages of less than 50%. Most of the bank’s loans are made on a long-term basis so the group is not dependant on volatile, short term financing.
On top of all this, Tweedy is excited about Standard’s exposure to the fastest growing parts of the world, where middle classes are on the rise.
We don’t all hold the same opinions
Tweedy, Browne Partners has a long record of successfully picking stocks, but we don’t all hold the same opinions and, for some, Standard might not be a suitable investment.
Indeed, the bank’s exposure to the commodity market is concerning and data suggests that Standard might be forced to ask shareholders for more cash, in order to bolster its capital position and financial cushion.
