Big bank shares such as Australia & New Zealand Banking Group (ASX: ANZ), Westpac Banking Corp (ASX: WBC) and CBA (ASX: CBA) will be a core part of many Australian investors' portfolios.
That's because both retail and institutional investors are attracted to their big and reliable dividends, alongside the defensive benefits of owning some of Australia's most dominant and profitable businesses.
In fact every institutional fund manager running an active Australian equities fund benchmarked against the core S&P/ ASX200 Index (ASX: XJO) will have almost no choice but to have some exposure to these businesses unless they want to risk their fund tracking wildly from the index. And not many want to do that.
Indeed whether a professional fund manager chooses to be over or underweight bank shares generally, or just specific ones will have a big impact on their performance relative to the benchmark.
Professional investors Yarra Capital Management have no holdings in National Australia Bank Ltd (ASX: NAB) shares in their Australian Equities Fund. Here's why.
" NAB's domestic business is a clear underperformer relative to peers, with pre-provision earnings stagnant over a number of years and significant catch-up investment required as evident by its move to accelerate costs and investment in FY18 together with a large ($755mn) restructuring charge. After a large 5-8% step-up in costs in FY18, NAB has guided to flat cost growth in FY19 and FY20, which we believe is unsustainable. We do not regard NAB's valuation – at 10.7 times forward earnings and 1.3 times book value – as being appealing when considering these headwinds."
NAB has the worst long-term track record of the big four banks in terms of capital growth and while past performance is no guide to future returns it's often a good indicator for many reasons.
Over the long term CBA has been the best performer for investors, as it's often considered to have the best technology platforms and to be well run.
NAB on the other hand is in the midst of a scandal where its CEO's and ex-CEO's chief of staff is alleged to have been engaged in a huge expenses and kickbacks rort that went on for many years right under the noses of its senior management team and auditors.
As such investors might side with Yarra in thinking this isn't an organisation with great management, controls, or shareholders' interests in mind.
