Top Charles Schwab investor sold entire stake amid banking turmoil

One of Charles Schwab’s largest investors sold its entire $1.4bn stake in the brokerage giant during last month’s banking turmoil amid fears over paper losses on its bond portfolio following the collapse of Silicon Valley Bank.

GQG Partners, a Florida-based investment firm, had been among Schwab’s top 15 shareholders with 1 per cent of the stock, according to Bloomberg data, and was one of the only active managers with such a large position.

It sold the stake due to concerns over the unrealised losses and that a profit-crimping movement of deposits would affect the brokerage’s future growth.

“We didn’t see an existential risk but they were caught up in the sentiment around banks,” Mark Barker, head of international at GQG Partners, told the Financial Times when asked about the share sale.

GQG had built the position in the third quarter of 2022, according to securities filings. The firm’s holding of 17.4mn shares at year-end was worth $1.4bn, though it is unclear how much the shares were worth when the stake was sold.

Schwab, an investment group with a banking licence, was among the hardest hit firms during the turbulence last month, when the US government was forced to step in to protect depositors at SVB and Signature Bank after the two lenders failed in quick succession.

The value of Schwab shares have fallen about a third since early March, when fears about the health of firms with large underwater bond portfolios hit fever pitch.

The turmoil hit as Schwab customers were already moving their cash from low-yielding accounts to products with higher returns such as the broker’s money market funds, allowing them to take advantage of interest rate rises implemented by the US Federal Reserve.

“With all the inflows to money-market funds Charles Schwab is losing deposits revenue,” added Barker.

Schwab declined to comment.

Investors and depositors will receive a clearer view of the damage done to the regional banking sector and Schwab when US companies announce first-quarter earnings next week. Schwab releases its results on Monday.

At the end of the year, Schwab held a combined $330bn in mortgage-backed bonds, treasuries and debt securities. But the portfolio was worth $307bn when marked down to take account of the decline in bond prices, which have fallen as the Fed has raised rates.

Some of those unrealised losses caused the brokerage’s common equity to fall to $27bn at the end of the year compared with over $46bn at same point in 2021, the filings showed.

Rising rates have not only hit Schwab’s bond portfolio, but also created a drag on revenues. Deposits at its bank fell 17 per cent to $366bn last year. Meanwhile, its interest costs more than tripled to $1.6bn, hitting its profit margins.

In a letter to clients earlier this month, Schwab said rising rates and customers’ movement of cash from low-returning deposit accounts to money market funds and certificates of deposits, which hold money for a fixed amount of time, would hit its earnings.

However, the broker said its business was “extremely robust” and that $53bn in client funds had flowed into the firm in March, almost a record number for that month.

Schwab said it expected higher funding costs to eventually decline as clients decide to hold more cash on deposit, reviving its overall earnings growth.

“While the first quarter was a challenging time, for sure, reflecting negative investor sentiment, ongoing interest rate hikes, and regional banking turmoil, Schwab’s client-centric growth model remains firmly intact and is performing well,” it told clients.

GQG amassed its Schwab stake last year as part of a broader effort to increase its exposure to financial services firms. Other investors think the broker’s depressed share price is a buying opportunity. Billionaire investor Ron Baron marginally increased his stake in the first quarter of this year, his firm told the FT.