Polar Capital Global Financials Trust plc (the "Company"): The Company is an investment company with investment trust status and its shares are excluded from the Financial Conduct Authority’s (“FCA”) restrictions on the promotion of non-mainstream investment products. The Company conducts its affairs, and intends to continue to conduct its affairs, so that the exemption will apply.
The Company is an Alternative Investment Fund under the EU's Alternative Investment Fund Managers Directive 2011/61/EU as it forms part of UK law by virtue of the European Union (Withdrawal) Act 2018.
The Investment Manager: Polar Capital LLP is the investment manager of the Company (the "Investment Manager"). The Investment Manager is authorised and regulated by the FCA and is a registered investment adviser with the United States' Securities and Exchange Commission.
Key Risks
- Investors' capital is at risk and there is no guarantee the Company will achieve its objective.
- Past performance is not a reliable guide to future performance.
- The value of investments may go down as well as up.
- Investors might get back less than they originally invested.
- The value of an investment’s assets may be affected by a variety of uncertainties such as (but not limited to): (i) international political developments; (ii) market sentiment; and (iii) economic conditions.
- The shares of the Company may trade at a discount or a premium to Net Asset Value.
- The Company may use derivatives which carry the risk of reduced liquidity, substantial loss and increased volatility in adverse market conditions.
- The Company invests in assets denominated in currencies other than the Company's base currency and changes in exchange rates may have a negative impact on the value of the Company's investments.
- The Company invests in a concentrated number of companies based in one sector. This focused strategy can lead to significant losses. The Company may be less diversified than other investment companies.
- The Company may invest in emerging markets where there is a greater risk of volatility than developed economies, for example due to political and economic uncertainties and restrictions on foreign investment. Emerging markets are typically less liquid than developed economies which may result in large price movements to the Company.
Important Information
Not an offer to buy or sell: This document is not an offer to buy or sell or a solicitation of an offer to buy or sell any security, and under no circumstances is it to be construed as a prospectus or an advertisement. This document does not constitute, and may not be used for the purposes of, an offer of the securities of, or any interests in, the Company by any person in any jurisdiction in which such offer or invitation is not authorised.
Information subject to change: Any opinions expressed in this document may change.
Not Investment Advice: This document does not contain information material to the investment objectives or financial needs of the recipient. This document is not advice on legal, taxation or investment matters. Prospective investors must rely on their own examination of the consequences of an investment in the Company. Investors are advised to consult their own professional advisors concerning the investment.
No reliance: No reliance should be placed upon the contents of this document by any person for any purposes whatsoever. None of the Company, the Investment Manager or any of their respective affiliates accepts any responsibility for providing any investor with access to additional information, for revising or for correcting any inaccuracy in this document.
Performance and Holdings: All data is as at the document date unless indicated otherwise. Company holdings and performance are likely to have changed since the report date. Company information is provided by the Investment Manager.
Benchmark:The Company is actively managed and uses the MSCI ACWI Financials Net TR Index as a performance target and to calculate the performance fee. The benchmark has been chosen as it is generally considered to be representative of the investment universe in which the Company invests. The performance of the Company is likely to differ from the performance of the benchmark as the holdings, weightings and asset allocation will be different. Investors should carefully consider these differences when making comparisons. Further information about the benchmark can be found www.mscibarra.com.
Third-party Data: Some information contained in this document has been obtained from third party sources and has not been independently verified. Neither the Company nor any other party involved in compiling, computing or creating the data makes any warranties or representations with respect to such data, and all such parties expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any data contained within this document.
Country Specific Disclaimers
United States: The information contained within this document does not constitute or form a part of any offer to sell or issue, or the solicitation of any offer to purchase, subscribe for or otherwise acquire, any securities in the United States or in any jurisdiction in which such an offer or solicitation would be unlawful. The Company has not been and will not be registered under the United States Investment Company Act of 1940, as amended (the “Investment Company Act”) and, as such, the holders of its shares will not be entitled to the benefits of the Investment Company Act. In addition, the offer and sale of the Securities have not been, and will not be, registered under the U.S. Securities Act of 1933, as amended (the “Securities Act”). No Securities may be offered or sold or otherwise transacted within the United States or to, or for the account or benefit of U.S. Persons (as defined in Regulation S of the Securities Act). In connection with the transaction referred to in this document the shares of the Company will be offered and sold only outside the United States to, and for the account or benefit of non-U.S. Persons in “offshore- transactions” within the meaning of, and in reliance on the exemption from registration provided by Regulation S under the Securities Act. No money, securities or other consideration is being solicited and, if sent in response to the information contained in this document, will not be accepted. Any failure to comply with the above restrictions may constitute a violation of such securities laws.
Further Information about the Company: Investment in the Company is an investment in the shares of the Company and not in the underlying investments of the Company. Further information about the Company and any risks can be found in the Company’s Key Information Document, the Annual Report and Financial Statements and the Investor Disclosure Document which are available on the Company's website, found at: https://www.polarcapitalglobalfinancialstrust.com
Fund Manager Commentary As at 31 December 2024
Market review
Global equity markets succumbed to profit-taking in December as Fed Chair Jerome Powell made hawkish1 comments about the outlook for US interest rates leading to a sharp increase in yields on 10-year US Treasuries. Financials were not immune and fell 2.3%, as illustrated by the Trust’s benchmark, the MSCI All Country World Financials Index. Against this background the Trust’s net asset value fell 2.5% with an underweight to China and holdings in RenaissanceRe Holdings, a Bermudan reinsurer, and Allfunds Group, an investment platform, being the biggest drags on performance, offsetting stronger performance from European bank holdings such as Erste Group.
US financials fell 3.9% in December, following a 12.2% rise in November, with US insurance stocks counterintuitively seeing the greatest pullback, down 6.4% over the month, although banks were also weak. Insurance stocks have materially underperformed the wider sector over the past three months largely due to investors rotating away from defensive and into cyclical stocks as the outlook for the US economy has improved and the consequences of the election of Donald Trump are understood.
European financials rose over the month while Asian financials were also relatively resilient, supported by strength in China and to a lesser extent Japan although the latter was offset by weakness in the yen. Chinese financials, up 9.2% over the month, reacted positively to a series of government announcements detailing both fiscal and monetary stimulus measures to revive the economy.
Outlook
Global financials, as per the Trust’s benchmark, rose 26.5% in 2024 compared to the wider equity market which rose 19.6% as investors bought into the soft-landing narrative for the US economy. This is the third year out of the past four that financials have outperformed and the sixth best calendar year for performance going back to 1995, as per MSCI data. Similarly, on a calendar year basis, one has to go back to 2007-12 to find a five-year period where the total returns would have been negative, not surprisingly reflecting the impact of the global financial and Eurozone crises on share prices.
From a valuation perspective, the closing scores at the end of December had the sector trading on a forecast calendar year 2026 P/E2 multiple of 12.6x compared to global equity markets on 18.1x while the US equity market (the S&P 500 Index) was on 21.7x. The discount at which the sector has traded relative to wider equity markets increased materially in the lead up to the pandemic, reaching its peak of around 45% in October 2020. Today, the discount has reduced to just under 30%, which is where it was trading before the pandemic, compared to c15% in July 2013 when the Trust was launched, albeit today profitability is higher than at the end of 2019 and in 2013.
Within the sector, banks and insurance companies are the biggest contributors to that low P/E multiple, at 10.0x and 11.6x respectively, but it is within European banks, which trade on 7x, where some of the deepest value continues to be found. However, one has to go outside developed markets to, for example China, Brazil or Mexico, to find banks trading on lower valuations. At the other end of the spectrum, while one can find banks in India and Indonesia that trade on much higher multiples, albeit for good reason, in developed markets it is Australian banks on 19.2x which are at odds with fundamentals.
The Trust’s largest exposure is to US financials that should be beneficiaries of a lighter regulatory regime and a more favourable environment for M&A in 2025 due to the election of Trump. Lighter regulation has its risks, but the increased regulation that financial services companies have been hit with over the past 15 years has led to a level of complexity and regulatory overlap that damages economic activity and often increases costs for little or no benefit. There were proposals in 2023 for a substantial increase in US bank capital requirements. We saw these as misplaced and unsurprisingly they have been watered down since, and after Trump’s inauguration we would expect to see further revision.
We continue to like European banks and, selectively, some Asian banks. Our reticence for not owning more of either is motivated by the headwinds for anaemic growth in Europe and Asia with tail risks from US tariffs. Similarly, while we like Mexican banks, we are happy to sit on the sidelines for now until we see better risk/reward. Also, we do not like Australian banks on their current valuation multiples. Not owning them was a drag on performance in 2024, but we do not believe the laws of gravity have changed and expect their shares to continue to perform poorly.
The move higher in interest rate expectations and government bond yields over the past month and into the New Year, particularly in the UK, will have positive and negative consequences for the sector. All things being equal, most banks and insurance companies will be more profitable than they would if interest rates were cut as expected. However, banks and insurance companies are exposed to credit risk so conversely there will be added concern around the potential for an increase in bad debts, with the former much more sensitive to this issue.
We have long argued that there is a correlation between loan growth and loan losses. With banks having not grown their loan books materially over recent years, it would take a significant economic downturn to generate losses that could justify the current multiples that some bank shares trade on. A UK banking analyst from research firm KBW summed it up succinctly in a recent note, with an analogy that can be extrapolated to other banking markets: “In recent years, UK banks have survived a fall in GDP of 10%, interest rates rising by 5% and inflation peaking at more than 11% with zero credit problems.” Consequently, we continue to believe the market is not giving the sector the credit it deserves for that reduction in risk.
1Comments in support of higher interest rates to control inflation, which can slow economic growth
2P/E stands for price-to-earnings ratio, which relates a company's share price to its earnings per share
Nick Brind
Nick’s experience comes from running specialist and generalist funds with UK and global mandates for the past 25+ years
George Barrow
George is a specialist financials fund manager as well as an analyst across Europe, Asia and emerging markets
Tom Dorner
Tom joined Polar Capital in 2023 and is the analyst responsible for the global insurance sector
Historical Fact Sheets