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Fund Profile

Polar Capital Global Financials 21 February 2023

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Disclosure – Independent Investment Research

This is independent research issued by Kepler Partners LLP. The analyst who has prepared this research is not aware of Kepler Partners LLP having a relationship with the company covered in this research report and/or a conflict of interest which is likely to impair the objectivity of the research and this report should accordingly be viewed as independent.

Overview
PCFT offers a specialist financials exposure, with gearing and off-benchmark opportunities…
Overview

Polar Capital Financials Trust (LON:PCFT) is the flagship vehicle from Polar’s specialist financials’ team. It aims to offer broad global financials exposure, including banks, insurance, asset management, exchanges and other diversified financials. The trust is run by three co-managers, namely John Yakas, Nick Brind and George Barrow, who use their experience and expertise to look for quality financials companies from across the globe, including emerging markets (see Portfolio). John Yakas recently announced his retirement from the team in June 2023. It is the sole trust in the AIC Financials sector, making it the only option for investment trust investors to access the asset class.

The portfolio will predominantly consist of equities, though the managers can allocate up to 10% in fixed income. This will help achieve the income goals of the trust, where the managers look to grow the Dividend each year. During the pandemic, many banks suspended their dividends, meaning the trust had to maintain its dividend with the help of revenue reserves. The managers have made some portfolio changes, which they believe should further support income generation and allow the board to, potentially, permit a return to dividend growth soon.

The managers believe the fundamental outlook for the sector has improved as a result of a change in the interest rate environment. This has been a headwind for much of the previous decade but has shown signs of a turnaround in the past couple of years (see Performance). The managers believe the sector has a considerable amount of ground to make up, though. Whilst the trust hasn’t historically produced alpha over its benchmark, it does offer broad exposure to the asset class, which has the opportunity to be enhanced with Gearing, with the goal of improving returns over the long term.

Analyst's View

PCFT is the only trust in the AIC Financials sector and the only way to access the financials sector in a specialised closed-ended fund, although there are some open-ended options, including those run by the same managers. As well as the growth potential in the sector, the income growth objective means the trust offers a healthy dividend (yielding 2.8% at the current price), which it has supported through the use of reserves throughout the pandemic.

The trust can also take advantage of Gearing, unlike its open-ended peers, and any passives. Unfortunately, the timing of deployment of gearing has gone against the managers and it has failed to enhance returns. This could, however, be a source of outperformance in future, particularly if the managers are right that the sector has a positive outlook. That said, alpha generation has been limited over most time periods (see Performance). Whilst this has been disappointing, the sector has been volatile and we believe that it has been a difficult environment for the managers to add value.

We believe financials look interesting at this juncture, putting the trust in an interesting position for investors given the structural advantages of investment trusts relative to open-ended funds. The managers have highlighted improved fundamentals, caused by higher interest rates and lower valuations, as two key reasons to support the sector. We think that if global growth surprises to the upside in 2023, financials could continue to do well, although the risk remains that if rates are cut quickly and fast, it could hurt banks’ profitability.

Bull

  • Higher interest rates, and low valuations are potential tailwinds for the sector
  • Only investment trust investing directly in financials, which offers potential structural advantages relative to open-ended funds
  • Global diversification means PCFT may complement existing portfolios

Bear

  • Financials could do poorly in a recession
  • Trust has underperformed benchmark index
  • Fees are high and there is a performance fee
Continue to Portfolio

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