Forget the banks: 3 financial shares for income and growth in 2016

Many Australian investors will own shares in one or more of the big banks like Commonwealth Bank of Australia (ASX: CBA) or Westpac Banking Corp (ASX: WBC) partly because of their perceived defensiveness and the juicy fully franked dividends they offer those seeking income.

However, both of the above have traded flat in 2015, while raising funds from existing shareholders in order to raise capital adequacy ratios that are ironically weakened every time they pay out those big interim and final dividend payments.

In effect the dividend payments to shareholders are being partially requested back via capital raisings, which means the capital growth outlook for 2016 is soft given that the banks may be forced to raise more cash in the year ahead.

There’s also the soft outlook for residential property and the Australian economy in 2016 to act as headwinds, which means investors may be better off looking elsewhere for capital growth and a growing income stream.

Fund mangers with international exposure may outperform due to stronger overseas equities markets and the tail wind of Australian investors moving their funds into international investments rather than Australian equities.

Below I have three of the best fund mangers that may offer a better total return than the banks in the years ahead.

Henderson Group plc (ASX: HGG) is the UK-based global asset manager with around $165 billion in assets under management and a market value of around $6.5 billion. Dual-listed, the ASX scrip has climbed 58% in 2015 on the back of strong investment performance and solid net fund inflows. At $6.35 the group trades on 16.5x analysts’ forecasts for earnings in FY16, with an estimated yield of 3%.

Macquarie Group Ltd (ASX: MQG) as a bank is admittedly subject to similar capital adequacy requirements to the big four banks, but retains a stronger outlook for earnings and capital growth in my opinion.

Macquarie is more leveraged to the strength of overseas equity and other capital markets than the big 4 banks and at $82.90 currently trades on less than 13x annualised earnings per share of $6.50, when using H1 FY16’s result of $3.25 per share. The bank expects the second half to be slightly lower than the first half due to timing differences, but with a decent outlook, attractive valuation and estimated yield in the region of 4.5%, I would not bet against capital gains in the year ahead.

Magellan Financial Group Ltd (ASX: MFG) is another business with strong leverage to the blue-chip end of US equity markets in 2016 and the appreciation of the US dollar. The business posted (diluted) earnings per share of around 102 cents in FY15 with another strong year of growth forecast. Thomson Reuters reports that one analyst is predicting earnings per share of 120 cents in FY16. Selling for $27 that would place the group on 22.5x forward earnings, with an estimated yield in the region of 3.1%. However, these are just estimates and if US equity markets and Magellan’s investment performance remains strong in the first half of calendar year 2016, I expect the money manager will surprise to the upside when it posts its full year results in August 2016.

Of the three above, I would prefer Macquarie and Magellan as long-term buys provided you’re moderately positive on the outlook for global equity markets in the year ahead.

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Motley Fool contributor Tom Richardson owns shares of Macquarie Group Limited and Magellan Financial Group.

You can find Tom on Twitter @tommyr345

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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