Investment Insider: As confidence rises, financial service shares are worth a look

David Kuo

Who would have guessed that the UK finance industry would ever recover from the severe beating it has taken over the past few years? But it has.

According to the latest survey from the CBI and accountant PWC, confidence in the sector has dramatically recovered in the last quarter. So, how can we, as investors, capitalise on this?

By and large, stockbrokers are said to be geared plays on the stock market, meaning that if the market does well then stockbrokers' shares should do even better. Shares in Brewin Dolphin Holdings, which manages clients' portfolios and offers internet trading, have returned more than 100 per cent since the FTSE 100 index hit a low of 3,512 points on 3 March 2009. By comparison the index has returned 83 per cent.

Brewin Dolphin is not alone. Close Brothers Group, which provides banking, securities and asset management services, has returned 94 per cent. And, Charles Stanley, which offers stockbroking and management services, has returned 100 per cent.

The rise in stockbrokers' shares is not entirely unexpected. Consider Brewin Dolphin, which saw a 40 per cent cut in profits from £42m to £26m between 2007 and 2009. Profits have gradually recovered and the dividend yield of 4.2 per cent looks quite decent too, as indeed do the yields for other brokers.

Money managers are also likely to benefit as investors regain their risk appetite. And so these are also seen as geared plays on a stock market recovery.

Aberdeen Asset Management has delivered a return of 133 per cent since March 2009. Other fund managers have equally impressive, if not better, returns. Ashmore, an emerging market specialist, has returned 273 per cent or 54 per cent a year, while Henderson Group and Investec have returned 131 per cent and 151 per cent respectively.

Geared plays can be a great way to outperform the wider market. But they are a double-edged sword. Just as profits can rise quickly when market confidence is high, they can evaporate even faster should shares fall.

David Kuo is director of the financial advice website www.fool.co.uk

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