Visa Inc. (V) and MasterCard Inc. (MA), the biggest bank-card networks, produced better risk-adjusted returns than 81 publicly traded U.S. financial firms as the two benefit from a long-term global shift to electronic payments.
Shares of Visa and MasterCard outperformed every company in the Standard & Poor’s 500 Financials Index during the past year, according to the Bloomberg riskless return ranking. Visa, based in San Francisco, returned 1.59 percent after adjusting for price swings in the 12 months ended last week, helped by a volatility that was lower than that of two-thirds of the stocks in the index. MasterCard climbed 1.18 percent.
The networks route payments and guarantee settlement, and both have more than doubled revenue in the past six years amid a consumer shift from cash to electronic payments that shows no signs of abating. They don’t lend money, avoiding the profit squeeze banks face from record-low rates, and they’re subject to less regulatory scrutiny than lenders or insurers, insulating their stocks from sharper price swings, analysts said.
“They are very sophisticated toll collectors,” said Darrin Peller, an analyst with Barclays Plc. “It’s a very profitable group that’s very capable of managing and controlling their earnings power.”
Visa and MasterCard aren’t included in the S&P sub-index, though they’re frequently compared to financial-services firms.Discover Financial Services (DFS), the credit-card lender that also owns a payments network, had the index’s second-highest risk- adjusted return after Simon Property Group Inc., the Indianapolis-based real estate investment trust.
Visa and MasterCard are part of the 70-company S&P 500 Information Technology Index, and ranked second and third for risk-adjusted returns after Apple Inc. (AAPL), based in Cupertino, California.
JPMorgan Chase & Co. (JPM), which earlier this month reported a $2 billion loss tied to trades on illiquid credit derivatives, had risk-adjusted returns of negative 0.43. The New York-based lender, the biggest U.S. bank by assets, was 35 percent more volatile than Visa and 11 percent more than MasterCard.
Five of the six largest U.S. lenders were among the worst performers in the S&P financials index for risk-adjusted returns. JPMorgan, Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS) ranked 62nd, 70th 71st, 76th and 77th, respectively. Only Wells Fargo & Co., which ranked ninth, had a positive risk-adjusted return.
“Financial-dedicated investors have been looking for places to hide,” said Benjamin Hesse, who manages five financial-stock funds and leads a team of 15 analysts at Boston- based Fidelity Investments. “In general, the payment networks have seen their model improve the most in financial services.”
Erica Harvill, a Visa spokeswoman, JPMorgan’s Joseph Evangelisti and MasterCard’s James Issokson declined to comment.
The risk-adjusted return, which isn’t annualized, is calculated by dividing total return by volatility, or the degree of daily price variation, giving a measure of income per unit of risk. A higher volatility means the price of an asset can swing dramatically in a short period, increasing the potential for unexpected losses.
Warren Buffett’s Berkshire Hathaway Inc. (BRK/A) has taken stakes in Visa and MasterCard as investment manager Todd Combs, who ran a hedge fund focused on financial stocks before joining Berkshire in 2010, builds his portfolio. Berkshire owned almost 2.9 million Visa shares and 405,000 MasterCard shares as of March 31, Omaha, Nebraska-based Berkshire said in a regulatory filing, Bloomberg reported.
