Fund Profile

Polar Capital Global Financials 03 November 2021

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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 exposure to a sector which should do well in a rising interest rate environment…
Overview

Polar Capital Global Financials Trust (PCFT) aims to generate a growing dividend income along with capital appreciation. PCFT owns a portfolio of companies operating within the global financial sector across conventional industries such as banking and insurance, as well as disruptive fintech stocks.

PCFT is managed by John Yakas, George Barrow and Nick Brind. The managers’ investment process is both quantitative and qualitative, and they look to identify high-quality companies, as we discuss under Portfolio. The portfolio is typically biased towards small and mid-caps, and the trust, has a fairly consistent level of Gearing. This explains why the trust has displayed a high beta in the past, even compared to the more volatile MSCI ACWI Financials benchmark.

In recent years the team have raised the allocation to SMIDs and to Asia. This, plus the allocation to intech (c. 7% of the portfolio as of 30/09/2021), means the portfolio is arguably more exposed to the growth end of the overall value-exposed financials sector.

As we discuss in the Performance section, PCFT has performed very strongly over the past year, with financials benefitting from the reopening of economies and optimism about the post-pandemic period, and from the prospects for rate rises which would benefit banks’ profitability. The shares have traded on a premium for most of 2021, and the premium is currently 1.5%.

The trust was launched in 2013 with a fixed life ending in April 2020. However, the board put an alternative to shareholders, and they voted for continuation. Under that alternative, the board committed to a rolling five-year tender offer for 100% of the shares. PCFT has a 2.5% historical dividend yield.

Analyst's View

We think PCFT could present an exciting investment opportunity if the recovery from the pandemic continues as hoped. The financial sector is a major beneficiary of rising interest rates, which likely explains the current premium – investors may be using PCFT as a hedge against rising rates. Of course, if rates are being progressively raised to tame runaway inflation, then there could be other recessionary forces which would be felt negatively by banks too. We note that financials are a more ESG-friendly way to play a continued reflationary rally than oil & gas or commodities, which could add to PCFT’s appeal because it is the only specialist trust in this sector.

One of PCFT’s strengths is the ability of the managers to invest across the globe and outside the conventional banking system, meaning they can seek out the best opportunities when certain countries are struggling. This means we think the trust could offer diversification to investors who hold the big UK retail banks as dividend plays. While PCFT does offer an income, the 2.5% yield is not high relative to conventional equity income plays but is high from a potentially diversifying source.

bull bear
High beta method to play an economic recovery
Gearing and exposure to midcaps can lead to sharper market falls in economic downturns
Offers exposure to high-growth areas of the financials space such as emerging markets and fintech
Financials could be vulnerable to a setback in the recovery
Could do well in a rising interest rate environment
Performance fees are viewed as a negative by some investors
Continue to Portfolio

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