Student Investment Management Financial Sector Grant Daniels Arvind Mukundan John Ohrstrom Logan Olson

Sector Overview Industries: Banks Capital markets Consumer Finance Diversified Financial Services Insurance Mortgage REITs Thrifts & Mortgage Finance

Supply & Demand Financial Sector is in an EXPANSION phase Evidenced by improving economy and rising interest rates Financial industry has still not fully recovered from 2008 crisis. Expansion is ongoing we expect this to continue as rates rise and economies improve. Further expansion is based on rising rates and continued economic health. The Fed holds significant power in determining continued expansion Foreign economies/governments will effect length of expansion (Ex – Brexit) The sector could also benefit from a reduction in overall taxation and regulation coming out of Washington DC Provided worldwide economies continue to improve, we expect to see both retail and institutional consumers continue to seek additional services, further continuing the expansion phase of the economic cycle.

Five Forces Analysis

Interest Rates – All Time Low

Economic Factors Financial Sector is cyclical with the market and hence any factor that affects market will have a direct impact on the performance of the Finance stocks as well. Here are a few macro economic factors that affect market

Economic Factors Cont.

Financial Analysis S&P 500 Financials vs. S&P 500 Until the financial crisis, historically the sector had outperformed the broader market. Since 2008 though, the trend has reversed. Increased regulation of the financial industry and fallout from the crisis have hampered the sector. Tech stocks have taken over leadership in the broader index Furthermore, many benchmarks show a considerable lag between the sector and the broader market. With a recent pull back in the IT sector and the improved position of firms relative to the regulatory environment the sector has been advancing recently.

Financial Analysis Cont. Summary Data Profit margins for the sector have been trending up recently from 11.3% to 14.7. The S&P as a whole is up only 0.4% over the same period. Likewise, operating margin has increased significantly for Financials, while is up only 0.2% Earnings are expected to rise to $27.7 b. Should that estimate hold, that would be an increase of 47.3% since 2012 with the S&P experiencing a gain of 31.6 % over the same period.

Financial Analysis Cont. Selected Company Highlights Many of the big names in the sector are trading at a discount to the market as a whole. JPMorgan Chase is especially interesting given its strong performance as well relatively low multiple. AON is actually trading at a premium to the S&P. Many individual firms in the sector have passed this year’s stress tests and have been the ability to begin increasing payouts to shareholders to 93%. Only American Express was required to resubmit its disbursement plans.

Sector Valuation Historically, the Fin. Sector has been cheaper than the S&P This continues today, but on a relative basis is significantly cheaper than 10 year median relative to S&P in every valuation ratio – see below

SIM Valuation

We recommend the SIM portfolio be OVERWEIGHT compared to the S&P 500. Recommendation We recommend the SIM portfolio be OVERWEIGHT compared to the S&P 500. Sector is in an expansion phase which we predict to continue Interest rates are expected to rise, which will lead to increased sector revenue Potential for decreased taxation and regulation from Washington

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