InvestorWeekly analysis shows the top 20 diversified financial stocks (by market capitalisation) have a median one-year total shareholder return (including dividends) of 42 per cent. These stocks benefit as a rising sharemarket lifts their funds under management and fees, and leads to stronger fund inflows.
Key wealth management stocks, such as Platinum Asset Management, BT Investment Management and IOOF Holdings, are up by more than 40 per cent over one year, and Perpetual has returned 91 per cent, off depressed levels.
Sector star Magellan Financial Group has returned 352 per cent over one year and its market capitalisation cracked $1 billion for the first time this month.
Led by the rally in bank stocks, the broader financial sector is also outperforming the sharemarket. The S&P/ASX 200 financials (excluding AREITs) has a one-year average annual total return of 31.4 per cent. The S&P ASX 200 Accumulation Index is up by 18.2 per cent.
Although bank stocks have attracted the most headlines, other large financial services stocks, which have significant wealth management operations, are rallying. After a few years of poor share price performance, AMP has returned 30 per cent over one year, and Macquarie Group is up 52 per cent from a 52-week low of $23.56 as investors reassess the investment bank's growth prospects.
Companies that rely heavily on sharemarket activity are also rising. Share registry Computershare has a one-year total return of 38 per cent and the Australian Securities Exchange is up 18 per cent. Treasury Group, an incubator of boutique managed funds, has a 56 per cent total return over one year.
The key question is whether this rally will lose steam as institutional investors take profits in higher-yield stocks and rotate into beaten-down sectors such as resources and parts of the industrial sector.
Much depends on the direction of interest rates this year. Some investment banks have forecast up to a one per cent cut in the official cash rate this year as the Australian economy struggles with an overvalued currency and sluggish growth in non-mining sectors.
Should that occur, bank term deposits rates would fall below four per cent and encourage more investors to move from low-yielding cash into higher-yielding shares, such as bank and wealth management stocks.
However, expectations of aggressive rate cuts in 2013 are being wound back as global economic data improve, commodity prices stabilise and the local sharemarket rallies.
Even so, aggregate savings in bank term deposits have only just begun to fall, from a peak of $546 billion in August 2012 to $539 billion, according to Reserve Bank data. And Australian Tax Office data show self-managed super funds are still overweight cash.
This suggests the rotation from cash to higher-yielding shares has further to run, even if interest rates are cut only once or twice in 2013 - or not at all -- provided global sharemarkets continue to be less volatile. The widely followed VIX index in the United States, a key gauge of market fear that shows expected market volatility, has fallen from a 52-week high of 27.7 to 12.4. The S&P/ASX 200 VIX index has more than halved from its 52-week high.
Inflows into long-only equity managed funds are also rising. Bank of America Merrill Lynch this month reported a second week of significant inflows into long-only equity funds, which provide higher margins for wealth managers. A few weeks of strong global inflows do not make a trend, but after huge fund withdrawals since the global financial crisis, a reversal in outflows is welcome news.
An HSBC survey released this month stated that three quarters of global fund managers had an overweight bias towards equities this quarter, and only 25 per cent had a neutral view. Fund managers were bearish on bonds and cash, showing potential for an acceleration in the 'great rotation', in which investors move from defensive assets into growth assets such as shares.
Contrarians might see this as a signal to take profits in wealth management stocks and reinvest in sectors that have lagged behind the sharemarket rally. But with demand for high-yielding securities likely to rise this year, wealth management stocks could have further gains in 2013, at a slower pace.
Tony Featherstone is a former managing editor of BRW and Shares magazines. All prices and analysis are as at 23 January 2013. He owns shares in AMP.
