Volatility, but financials remain resilient - August Trust Update
Nick Brind
Fund Manager
George Barrow
Fund Manager
Tom Dorner
Fund Manager
Market review
Despite a sharp selloff in equity markets at the beginning of the month, as weaker US economic data and an unwinding of yen carry trades caused a jump in volatility, financials and broader equity markets hit all-time highs. Federal Reserve Chair Jerome Powell’s dovish comments at the Fed’s annual symposium in Jackson Hole towards the end of the month had little impact on financial markets but reaffirmed the consensus view that the US would start cutting interest rates in September. Against this background the Trust’s NAV rose by 0.9% compared to the benchmark index, the MSCI All Country World Financials Index, which rose 1.0%.
Insurance
Our insurance holdings were a positive driver of performance in August with the likes of Hannover Rueck and Beazley both performing well after positive results and hitting all-time highs as they recovered from weakness in July. That weakness in the subsector was in part over concerns that the Atlantic hurricane season will be much more active this year, so far thankfully proven incorrect, while SCOR*, a French reinsurer, had a profit warning regarding its reserving in its US life and health book which also put pressure on other shares.
The CrowdStrike outage which led to weakness in Beazley’s shares in July has been estimated as upwards of a $1bn insured loss for the industry, substantially below what would be expected for a malicious cyberattack. It is believed the losses are concentrated on a small number of large companies and therefore unevenly distributed between those that underwrite cyber insurance. Demand picks up after events and there are early signs there has been a tightening in terms and conditions which if sustained will be positive for Beazley.
Berkshire Hathaway
An underweight position in Berkshire Hathaway was a drag on performance during the month. We reduced our holding a few months ago as a big attraction of owning the stock was its insurance businesses. This led to a big jump in earnings over the past couple of years, on top of the significant investment gains from its equity investments – strong tailwinds it had benefited from which would not continue at the rate they had. Consequently, we saw better value adding to other insurance holdings where valuations were and are much lower.
In the past year we saw other areas of the sector that offered more attractive returns to benefit from the softer landing narrative and pickup in activity in financial markets this year.
The company announced second quarter results during the month. Most notable was the sale of a further $75bn of equities, in particular Apple which has received wide coverage, but latterly Bank of America stock as well. As a result, cash and short-term securities have risen by $100bn in 2024 to over $270bn. Buffet hinted at lower buybacks at their AGM in May, suggesting he saw less value in them, and results show that buybacks were only $345m during the quarter, down by nearly 75% on the previous year. Including Q1, buybacks totalled $2.9bn, which compares to the peak of $18bn of buybacks in the second half of 2020.
OSB Group
OSB Group was also a drag on performance during the month. It is primarily a specialist buy-to-let lender that has consistently delivered high-teens and higher return on equity, reflecting its focus on niche lending segments coupled with a very efficient platform, with some of its operations handled in India. Poor communication by management led to a sharp fall in the share price as guidance for the outlook for net interest margins and therefore profitability was reduced in the short term and worries about increased competition surfaced.
There is a saying that profit warnings come in threes. We bought a holding in November 2023 and have added to it on a couple of occasions, after the bank first warned on earnings in July 2023. This is the third warning and despite that mistake we are still sitting on a profit, albeit now smaller. There is a risk that there is further weakening in guidance in the short term but with the shares trading at less than 4.5x earnings, which has been reduced a number of times, for a business we see as well capitalised and very profitable we are happy to continue to hold.
Bank exposure
The Trust’s bank exposure has been cut by over 20% over the past year and is down by nearly half from what it was at the end of 2022. In the past year we saw other areas of the sector that offered more attractive returns to benefit from the softer landing narrative and pickup in activity in financial markets this year, such as alternative asset managers. We also added to our insurance holdings, starting new positions in the likes of Allstate and Progressive in the US and Sabre Insurance Group in the UK to benefit from the tailwind in the motor insurance market.
Consequently, we are currently underweight banking stocks overall and it is only in Europe where we have an overweight position. European bank stocks have performed very well over the past few years on the back of rising interest rates, which has led to very strong positive earnings revisions. With the interest rate cycle turning down, the test will be to what extent the market does not appreciate that earnings estimates already assume eurozone interest rates falling from 4.25% to around 2.5% and/or risk that market expectations for the speed or number of interest rate cuts increases.
Nick joined Polar Capital following the acquisition of HIM Capital in September 2010, and is co-manager of Polar Capital Global Financial Trust and lead manager of the Polar Capital Financial Credit Fund. He has investment experience across a wide range of asset classes but since 2003 has focused on global financials.
Before joining HIM Capital, Nick worked at New Star Asset Management. While there, he managed the New Star Financial Opportunities Fund, a high-income financials fund investing in the equity and fixed-income securities of European financials companies. Previous to that, he worked at Exeter Asset Management and Capel-Cure Myers.
George Barrow
George joined Polar Capital in September 2010 as an analyst on the Financials Team. He is a co-manager on the Polar Capital Financial Opportunities Fund, and the Polar Capital Global Financials Trust, with Nick Brind and Tom Dorner.
He has over 10 years’ experience analysing Europe, Asia and emerging markets. Prior to joining Polar Capital, he was an analyst at HIM Capital from 2008 where he completed his IMC.
Tom Dorner
Tom joined Polar Capital as a Fund Manager in the Financials team in December 2023. He is a co-manager on the Polar Capital Global Financials Trust, with Nick Brind and George Barrow.
He joined from abrdn where he was a Senior Investment Director in the Developed Markets team and managed the abrdn Europe ex UK Income Equity Fund. He was responsible for analytical coverage of European financials and managed a number of other European investment funds during his nine years there. Prior to this, he was an analyst specialising in the European Insurance sector at Citi and Lehman Brothers in London.
