Disclaimer
This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. This material should be considered as general market commentary.
In January, our analysts released the latest list of Kepler Trust Intelligence ratings, which apply quantitative analysis to identify the top-performing closed-ended funds in the Growth, Income & Growth and Alternative Income categories. The ratings are designed to highlight those trusts which have achieved persistent outperformance, with attractive risk characteristics. As the selection system is entirely quantitative, it allows trusts to be compared without any personal biases and views – and without regard to any commercial relationships – and for us to look at the universe in a purely objective way.
In this regular blog we aim to highlight any interesting developments among our top rated trusts, whether it be a change in circumstance, a possibly attractive entry point or a piece of significant news.
Polar Capital Global Financials (PCFT)
Polar Capital Global Financials (PCFT) invests in one of the sectors worst hit during the turmoil caused by COVID-19. In fact, over the past decade financials have been an area which has been facing significant headwinds, largely thanks to a zero bound interest rate environment and relatively flat yield curves, which have hindered the banking sector profitability. Alongside this, since the financial crisis, there has been a harsh regulatory environment, causing a number of banks to cut dividends, and income seeking investors to shy away from the sector. COVID-19 therefore was another blow to a struggling sector, as investors took fright at the potential for huge loan book losses as the pandemic hit. The anticipated deflationary impact from the shuttering of significant proportions of the economy drove many investors to government bonds and saw central banks slash interest rates, where possible, and extend and expand policy support through less, typically, conventional means.
However, the reflationary rally since positive vaccine trial results came out has been good for the financial sector and for PCFT. Over the past six months the trust has delivered NAV total returns of 32.8% and is one of the best-performing trusts in our rated list. We believe PCFT could have room to run in 2021 if the pace of reopening continues as planned, and represents a potentially high beta play on the world’s economic recovery, with a number of underlying economically sensitive stocks. Although the trust is not solely invested in banks, with a number of key positions in payments companies like PayPal and MasterCard, it's the banks that dominate the portfolio. The largest geographic exposure is to the US where the managers believe that banks such as JPMorgan and Bank of America are well capitalised, have strong balance sheets and diverse revenue streams.
In early 2021 the uptick in US government bonds and steepening of the yield curve has boosted banks’ profitability by increasing the net interest they can earn on lending activity. Meanwhile the huge stimulus in the US should increase economic activity and therefore demand for credit. While PCFT has re-rated from a double digit discount six months ago to a premium of over 3%, the managers report valuations are still low in their universe and earnings look likely to rise significantly as economies reopen.
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