Dear Client, the last six months have been busy and productive for the team here at Fighting Financials. Amongst other things, we incorporated the business, completed the website build and appointed two fantastic professionals – with a combined 70 years of financial services experience – as Non-Executive Director and Senior Advisor respectively.

This month, we also successfully obtained regulatory approvals (find us here on the FCA register), a critical milestone for our business.

What does this mean? We can now act in an official capacity as your investment adviser. That covers:

  1. Our core goal of providing you with actionable investment ideas, but also
  2. Being available to discuss and review your portfolio and
  3. Being a general soundboard as you grapple with the uncertainties (and opportunities!) of investing in public market financials

The market opportunity: Why financials matter

The tradeable market for financials public equity and fixed-income issues across Europe and North America is substantial.

Taking UK-listed equities alone, as of the start of this year, there were 656 financial services and/or real estate issuers of common equity.[1] Said issuers accounted for 33% of all UK common equity issuers, making financials the largest UK-listed single sector by issuer number.

In turn, the total number of financials issuers was:

  • >6x that of Healthcare issuers (101 common equity issuers)
  • >3x that of Technology and Telecommunications issuers (206 equity issuers)
  • >2x that of Consumer Discretionary and Cyclical issuers (268 issuers)
  • >1.3x that of the Broad Industrials category, including Energy, Basic Materials and Core Industrials (485 issuers)

Indeed, the sector has a similar weighting significance on a market capitalisation basis. Hence, as of January, the combined market capitalisation of UK-exchange traded financials and real estate equities was £660bn, equivalent to 23% of all UK public equity market value, and also:

  • >5x the aggregate market cap of Tech and Telecoms issuers (£114bn),
  • >2x that of Healthcare issuers (£290bn), and
  • >1.1x that of Consumer issuers (£601bn).

Regarding public fixed-income markets, the weighting of financials is even greater. Given the nature of their business models, banks and insurers are large issuers of covered bonds, corporate bonds and other subordinated credit securities. Non-financial corporates, by contrast, are much more likely to issue debt privately through direct lenders or commercial banks.

Ultimately, both in the UK and beyond, financials represent one of the largest sectors across liquid equity and credit markets. In structural terms, banks, insurers, and other financial institutions form the backbone of major economies.

Whilst their names and guises have changed ("FinTech, "platforms," even "Banking as a Service," to name some recent rhetorical iterations), the fundamental business of lending, accepting deposits, and ultimately pricing risk remains the same.

The market opportunity

Despite this importance, we at FFL feel the sector often remains poorly understood and improperly resourced.

Unquestionably, traditional sellside research sector teams provide deep industry expertise and unrivalled access to company management. However, they often lack in:

  • Market breadth: the same analyst may spend an entire career looking at ten securities from the hundreds or thousands available within the investible universe), and
  • Actionability/conviction: of those ten securities covered, at least three to five may be “Hold” or “Market Neutral” recommendations.

Moreover, insofar as traditional sell-side research is often sold by the same institutions that are trying to win business from the very corporate clients that are the subject of said research, there is a question as to whether said research can live up to the principle of genuine independence.

Sell-side trading desks (such as the one I worked on between 2021 and 2023) address some of these shortcomings. Desks are often aligned with investors: for example, a desk may be disclosed as long or short a security that it assists a buy-side client in purchasing or selling. Desks are also well-resourced and can operate at scale.

However, desks often have inherent conflicts of interest as market makers. For example, a desk analyst trying to exit a position for the bank’s trading book may be pressured to convince you, the client, to buy the position, even if said analyst knows it's a bad trade.

It’s also true – partly due to the above conflict – that desks are often not technically producing regulated research. Published desk research may lack depth of analysis, including properly disclosed valuation methodologies. Desk ideas may even remain unpublished, available only verbally via client calls and meetings.

Finally, while we see huge innovation from independent research providers, often, this type of research takes the unregulated, quasi-journalistic blog format. It is therefore absent the depth and focus investors need to make specific, actionable single-stock decisions.

Other potential shortcomings of independent research providers — particularly in financials — include a lack of sector expertise and the inability to identify opportunities across the capital structure.

Initial portfolio and service

Fighting Financials exists to fill this gap in the market.

Our objective is to produce investment research that is simultaneously:

  1. Sector-specific: our core focus is on financials and real estate
  2. Capital-structure agnostic: we are opportunistic across public equities and credit
  3. Independent: no brokerage or banking operations
  4. High conviction: “Buy” and “Sell” ratings only (no “Neutral/Hold” ratings)

Key characteristics of the portfolio will include:

  • A target time horizon of 2-5 years
  • A target allocation across the portfolio of:
    • 40% long equities
    • 30% long credit
    • 30% shorts (equity and/or credit)
  • Target IRR of 10-14% for credit and credit-equivalent (e.g. hybrid, mezzanine and preference shares) ideas
  • For equities, meanwhile we'll recommend "Longs" we think can double and "Shorts" we think can halve, on a 2-5 year view.

Finally, we won’t have any hold recommendations: if an idea or company does not represent an actionable investment, we won’t write about it. If an idea works (i.e. it reaches our price target) or we change our minds, make a mistake or find a better idea, we’ll publish a note to remove said idea from coverage. Clients will be able to access all of our past research on the idea – along with our entire research archive – on the platform.

Ultimately, we live and die by our ability to find actionable investment ideas today and prefer to devote our time and resources to securities where we feel there is something to do.

Today, we have four active recommendations on the platform, and will add four more pilot ideas in the coming weeks. From June, subject to performance and market conditions, we will aim to add 1-2 new ideas each month, with our hard idea cap at 20 individual ideas.

Finally, as part of our service, institutional and professional clients will have the opportunity to have meetings and/or calls with the team to discuss our ideas, as well to make bespoke analysis requests.

We are not authorised to give personal investment advice to non-professional clients, but any such clients wishing to "opt up" to professional status can seek to do so by contacting us at info@fightingfinancials.com.

Other plans for the business in 2024

In the coming months, our core objective is to connect with you as clients and continue building our portfolio of high-quality, high-conviction investment ideas.

As mentioned above, we’ll restrict the number of active investment recommendations to twenty. We believe that such focus will give us the best chance of outperforming.

We’re also committed to being focused in terms of our clients. As a platform, we will cap our institutional client base at 10-15. This will allow us to maintain the high level of personal service and high-quality engagement that you deserve.

Above all, our mission is to be your partner of choice in international financials investing. That means 1) finding the best ideas globally within the financials and real estate universe and 2) staying independent.

We're excited to be going on this journey with you, and, as ever, we welcome your feedback, input and questions.

Now – let’s go find some ideas!

Your Fighting Financials Team


[1] LSEG/Refinitiv data, compiled by Fighting Financials Limited

Author
AO
Andrew O'Flaherty
andrew@fightingfinancials.com
Fighting Financials disclosure

Your capital is at risk. Professional investors only.