While investor focus is currently on what governments and the medical authorities are doing to combat Covid 19 the banking sector is also coming to the fore.
As an investment sector financials, which encompasses everything from banks to insurers and credit card lenders, is diverse and global but has been largely out of favour since the global financial crisis of 2008.
There is only one UK-based investment trust where investors can get exposure to the global financials sector and that is the Polar Capital Global Financials Trust, which launched in July 2013.
The trust is appealing because it has very limited exposure to UK financial companies, in particular high street banks, so could easily compliment any individual holdings investors might have in the likes of Lloyds or RBS.
The trust is jointly managed by Nick Brind and John Yakas, as part of a team with over 100 years’ experience.
Mr Brind points to the size of the financial sector as part of the opportunity – it accounts for over 17% of the value of global markets – and yet is under-owned by investors in the UK.
When he and I met a month ago he pointed to the ‘deep value’ in the sector, which since our meeting has become greater because of the sell-off caused by Covid 19.
The US is one of the country’s under appreciated for the size of the sector. Mr Brind says there is something like 4,900 different banks in the US alone, where as in the UK the number is a fraction of that amount.
‘So why should investors consider the sector,’ I asked Mr Brind.
“FOMO,” he said: “Fear of missing out. The sector on a global basis has never been so unloved and so cheap, and we would argue that over time through the next economic cycle there could be a very attractive opportunity to make money out of many of these companies.
‘If you take the banks, many of them are much stronger financially than they were in the immediate aftermath of the Global Financial Crisis, and yet their share prices don’t reflect this.’
When the trust launched it was initially for a fixed seven-year period which was due to end this May, but key shareholders have indicated they would like to continue.
So shortly the trust will officially continue for another five years, subject to all shareholders having a vote, a few changes will be made which arguably makes the trust more attractive for investors.
The fixed life of seven years will move to five yearly periods and will include a policy to buy-back shares to keep the discount at no wider than 5%.
The annual management charge will drop from 0.85% to 0.70% on the trust’s Net Asset Value, and the performance fee will only be charged if the trust outperforms the benchmark by at least 1.50%.
The trust is also switching to a more sensible benchmark which only has limited real estate investments in it but has a higher exposure to emerging markets.
The trust has six broad investment themes which the managers believe will provide good opportunities for the next decade.
These include banks which have lagged the markets ever since the Lehman’s crisis; emerging markets where the growth in financial services matches the steady rise in personal wealth in these nations; and non-life insurance and specialist underwriting companies.
The trust has one small holding in a challenger bank, Atom, but sees opportunities over time in Fintech businesses like PayPal; specialist banks and lenders in the US, UK and Europe which are classified as small and mid-caps such as Close Brothers, and finally the bonds of financial institutions.
For investors looking for a decent income the trust has a dividend yield of 2.9% and is committed to a ‘progressive dividend policy.’
Since launch the trust has achieved a 10% per annual total return – that’s a combination of share price rise and dividends – which is very good given the backdrop.
With the current sell-off in the markets the shares look very cheap, particularly as measured by the value of the underlying portfolio, so now could be a good chance to buy-in before the trust adds in the discount mechanism when the continuation trust starts later in the year.
Further reading: Interview with Nick Brind of Polar Capital Global Financials Trust