Christopher
Johnson:
Welcome
to
Morningstar.
My
name
is
Christopher
Johnson,
and
today,
I’m
joined
by
Sebastiano
Pirro,
the
CIO
and
Head
of
Financial
Credit
Strategies
at
Algebris
Investments.
Sebastiano,
thank
you
so
much
for
being
here
with
me.
Your
fund’s
AUM
totals
at
a
whopping
£10
billion,
but
some
argue
that
funds
can
get
too
big.
Can
a
fund
as
big
as
yours
be
a
victim
of
its
own
success?
Sebastiano
Pirro:
Size
can
bring
benefits
in
terms
of
running
a
fund
and
obviously
can
bring
also
hurdles.
So,
in
general,
I
would
say
that
our
best
performance
has
come
versus
our
peers
when
the
fund
had
a
similar
size
to
the
one
that
we
have
today.
Clearly,
we
have
to
adapt
in
running
it
and
this
is
ongoing,
it
happens
all
the
time.
You
need
to
keep
it
in
mind
when
you
run
such
a
large
fund
you
have
to
take
decisions
as
early
as
you
can.
But
then
there
are
also
the
benefits
of
running
a
large
strategy.
So,
if
you
are
well-positioned
in
certain
markets,
you
can
be
a
price
maker
and
you
can
basically
recover
the
money
that
maybe
you
left
because
of
running
it
in
a
certain
amount
of
way
at
other
times.
So,
I’d
say
on
balance
the
two
things
pretty
much
wash
out.
In
practice,
the
fact
that
the
fund
is
larger
means
that
you
have
to
run
it
slightly
more
conservative
than
if
you
were
smaller.
In
practice,
I
would
say
for
us
and
how
we
see
it
going
forward
is
right
now
given
the
strength
fundamentally
of
what
we
invest
in
and
the
idea
of
our
fund
being
a
long-only
one
is
basically
we
don’t
really
see
detriments
in
being
large
and
actually
we
see
the
ability
of
being
price
makers,
especially
in
primary
markets,
as
benefiting
our
investors
given
the
size.
CJ:
You
just
talked
about
the
fundamental
strengths
of
what
you’re
investing
in.
So,
what
are
your
expectations
for
the
European
banking
sector
in
2024?
SP:
The
expectations
are
that
we
have
–
if
you
look
at
the
fundamental
picture
today
of
European
banks,
it’s
the
best
environment
we
have
ever
invested
in
pretty
much.
We
have
record
amounts
of
capital
that
we
inherited
since
pre-pandemic.
We
have
the
highest
profits
of
the
last
15
years
and
of
course,
we
have
an
idea
that
these
profits
between
the
restricted
monetary
policies
which
can
induce
higher
loan
losses
and
the
reversal
of
this
tight
monetary
policy
with
rate
cuts
being
a
headwind
to
profits
going
forward.
That
has
to
be
compared
with
the
situation
that
we
were
investing
in
three
years
ago
which
were
negative
rates.
So,
we
still
think
that
the
environment
remains
a
very
good
one
even
looking
forward.
Even
if
profits
have
peaked,
they
have
not
peaked
everywhere.
But
even
if
they
were
to
plateau
where
we
are
today
or
even
trend
slightly
lower,
we
think
the
fundamental
picture
would
remain
undeniably
strong
for
European
banks.
CJ:
According
to
Morningstar
data
the
fund
returned
0.98%
beating
the
Markit
iBoxx
EU
Corp
Subordinated
Index,
which
lost
minus
3.17%.
So,
what
drove
these
numbers
over
the
last
three
years?
SP:
In
terms
of
our
strategy,
we’re
just
simply
buying
very
good
companies
that
are
performing
very,
very
well
that
benefit
from
higher
rates
and
we
were
doing
that
with
higher
yields
and
lower
duration.
So
mechanically,
that
produces
the
differential
in
performance
that
you
highlighted,
and
we
think
this
is
still
going
to
continue
to
be
the
case
because
the
yields
that
we
are
buying
today
are
actually
still
higher
than
most
of
the
corporate
indices
and
the
quality
of
the
underlying
is
generally,
not
everywhere,
but
generally
better
than
most
parts
of
the
market.
CJ:
So,
the
UK
is
your
top
country
allocation,
but
is
Brexit
still
the
elephant
in
the
room
for
the
financial
services
industry?
SP:
Brexit
is
an
ongoing
process
that
will
take
many,
many
years
to
play
out.
And
for
now,
it’s
not
been
a
positive
I
think
we
can
draw
conclusions
so
far.
Now,
first
of
all,
in
terms
of
the
allocations
of
our
fund,
we
mainly
invest
in
global
companies.
So,
our
global
banks
might
be
incorporated
in
the
UK,
and
the
reason
there
are
many
global
banks
that
are
incorporated
in
the
UK,
the
reason
for
that
is
because
the
institutions
for
the
banking
world
work
particularly
well
in
the
UK
versus
the
rest
of
Europe.
So
historically,
you
have
a
lot
of
companies
that
have
their
incorporation
in
the
UK
because
the
institutions
work
very,
very
well
but
not
necessarily
the
underlyings
are
driven
exclusively
by
the
country
and
in
some
cases
they’re
actually
completely,
I
wouldn’t
say
irrelevant
but
not
particularly
relevant
at
the
group
level.
So
even
where
we
have
a
high
allocation
to
the
UK
domestic
market
in
the
portfolio,
the
underlying
exposure
of
the
companies
that
operate
in
the
UK
is
much,
much
smaller.
So,
this
is
the
first
point
I
would
like
to
make.
The
second
point
is
that
the
banking
market
in
the
UK
remains
very,
very
strong
and
very
stable.
So,
I
am
unable
you
know
to
say
so
far
what
we
have
top-down
what
Brexit
has
produced
is
probably
lower
economic
growth
with
higher
inflation.
Now,
this
is,
I
wouldn’t
say
is
not
a
worry,
it’s
something
that’s
at
the
extreme
can
create,
especially
on
the
growth
side,
can
create
problems,
although
banks
operate
very,
very
well
with
inflation.
So
ultimately,
we
don’t
really
see
this
as
having
an
impact
in
the
portfolio.
We
are
mindful,
we
know
it.
And
it’s
probably
a
big
missed
opportunity,
mainly
on
the
equity
side.
But
for
the
credit
side,
what
has
happened
since
Brexit
is
that
spreads
have
widened.
And
so,
we
have
been
able
to
buy
very
good
companies
cheaper.
And
that
basically
has
not
been
a
detriment
to
the
fund’s
performance,
but
quite
the
opposite.
CJ:
Intesa
Sanpaolo,
Santander
and
Barclays
are
the
three
top
holdings
of
the
fund
at
8%
each.
So
why
are
you
bullish
on
these
issuers?
SP:
The
style
of
the
fund
is
to
have
a
sizable
exposure
to
issuers
where
we’re
comfortable
and
to
have
none
where
we
are
not.
I
think
in
banks,
the
idea
for
us
of
allocating
capital
is,
if
the
companies
operate
stably
and
are
in
good
health,
then
you
can
model
them
five
years
forward
and
be
comfortable.
And
anything
that
happens
–
there
are
obviously
unknowns
that
you
cannot
predict
at
times
that
do
materialize.
But
generally,
these
companies
are
able
to
cope
with
any
of
these,
because
ultimately,
we
invest
in
a
sector
that
is
also
stress
tested
for
negatives
each
year
by
the
regulators.
And
they
have
to
operate
with
a
level
of
capital
that
can
face
this
level
of
stress,
which
tend
to
never
happen.
So
ultimately,
yes,
we
are
very
comfortable
with
the
names
that
we
have
at
the
top
positions,
all
of
them.
They
all
highlight
very
strong
capital.
They
all
highlight
very
good
profitability.
On
the
sizes
of
the
positions
from
running
the
fund
perspective,
sometimes
companies
are
unfairly
discounted.
Think
about
Barclays
from
a
fixed
income
perspective
a
year
ago
was
heavily
discounted.
And
my
highlight
was,
the
company
was
still
running
at
above
10%
ROE.
It
was
well
profitable.
I
mean,
the
concerns
from
that
perspective
were
completely
misplaced
and
the
bonds
were
very,
very
cheap.
So,
if
risk-reward
all
of
a
sudden
turns
more
favourable
than
in
other
issuers,
we
will
increase
the
size
of
the
position.
And
that
is
what
you
see
reflected
in
the
fact
sheet
of
the
fund.
CJ:
UBS
Chief
Executive,
Sergio
Ermotti,
recently
criticized
European
politicians
and
regulators
arguing
they
are
suppressing
the
continent’s
banks,
whilst
US
rivals
dominate
globally.
Do
you
agree
with
this
view?
SP:
To
some
extent,
yes,
meaning
that
in
Europe,
the
rules
to
compete
within
a
single
market
are
not
yet
mature.
Let’s
call
it
like
that.
The
final
implementation
of
the
Basel
III
was
seen
globally
and
from
a
Europe
versus
US
perspective,
as
a
way
to
optimize
and
to
create
a
level
playing
field
between
these
companies.
And
as
you
have
seen,
since
the
framework
was
finalized
on
the
final
Basel
implementation
over
six
months
ago
in
the
US,
there
was
a
very
hard
push
from
the
industry.
And
the
recent
signalling
that
we
have
gotten
from
US
authorities
is
that
this
package
will
be
heavily
watered
down.
Whereas
in
Europe,
we
are
implementing
it
and
the
final
go
ahead
was
actually
given
last
week
by
the
parliament.
So,
to
some
extent,
European
rule-based
framework
might
be
more
inclusive
and
will
require
in
some
cases
higher
capital
requirements
for
certain
activities,
especially
on
investment
banking,
that
ultimately
push
–
they
don’t
create
a
level
playing
field
and
it
might
mean
that
US
competitors
have
a
higher
return
on
equity
while
doing
certain
activities,
while
they
become
largely
unprofitable
or
not
economic
for
some
European
issuers.
This
is
a
long-term
argument.
At
this
point
in
time,
I
think
that
Europe’s
biggest
problem
is
not
versus
US
institution,
but
it’s
basically
to
create
a
competitive
market
within
Europe
to
finally
finish
the
implementation
of
these
rules
and
to
create
a
level
playing
field
within
Europe,
because
that
is
a
problem.
If
you
have
seen
recent
comments
around
–
today,
Europe
is
much
better
than
it
was
10
years
ago,
but
let’s
say
if
you
operate
a
bank
in
Germany
and
a
bank
in
Italy,
the
synergies
that
you
have
within
these
two
markets
are
limited
and
they’re
limited
by
the
fact
that
too
many
differences
remain
from
this
perspective.
One
that
has
been
heavily
scrutinized,
for
example,
is
the
deposit
guarantee
mechanism,
which
today
remains
largely
national.
I
am
quite
comfortable,
though,
that
as
low
as
this
might
be,
we
are
increasing
competitiveness
and
today
banks
are
infinitely
more
competitive
in
Europe
than
they
were
10
years
ago.
So,
over
time,
we
shall
expect
more
integration,
which
is
especially
important
for
the
banking
sector,
and
to
make
sure
that
European
companies
can
operate
within
Europe
in
a
competitive
manner,
which
today
is
still
tentative,
let’s
say
that.
CJ:
This
is
Christopher
Johnson
from
Morningstar
UK.
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