Polar Capital Global - Half-year Report
11/07/2023 07:00
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RNS Number : 5548F Polar Capital Global Financials Tst 11 July 2023
POLAR CAPITAL GLOBAL FINANCIALS TRUST PLC
(the "Company")
Unaudited Results for the half year ended 31 May 2023
Legal Entity Identifier: 549300G5SWN8EP2P4U41
11 July 2023
Financial Highlights for the half year ended 31 May 2023
Performance (Sterling total return) For six months ended 31 May 2023 Since
% Inception
%
Net asset value (NAV) per Ordinary share (1)~ -8.1 107.6
Ordinary share price (2)~ -11.5 79.5
Ordinary share price including subscription share value (3)~ - 83.8
Benchmark (Sterling total return) (4) -8.4 104.6
MSCI ACWI Financials -8.4 115.1
Chain-linked benchmark
Other Indices and peer group (Sterling total return)
MSCI World Index 0.2 185.1
FTSE All Share Index 0.2 73.7
Lipper Financial Sector (5) -9.2 88.6
Since Reconstruction
Performance since the Reconstruction on 22 April 2020 %
(Sterling total return)
NAV per Ordinary share (6)~ 59.5
Benchmark (4) 53.1
Financials As at 31 May As at 31 May As at % Change
2023
2022
30 November 2022 Six months to 31 May 2023
Total net assets £484,034,000 £536,411,000 £541,272,000 - 10.6
NAV per Ordinary share 151.2p 161.8p 166.3p - 9.1
Ordinary share price 135.2p 152.6p 154.6p - 12.5
Discount per Ordinary share~ 10.6% 5.7% 7.0%
Net gearing~ 2.6% 3.7% 6.0%
Ordinary shares in issue (excluding those held in treasury) 320,075,000 331,525,000 325,394,000 - 1.6
Ordinary shares held in treasury 11,675,000 225,000 6,356,000 83.7
Six months to Six months to Year to
31 May 2023 31 May 2022 30 November 2022
(Losses)/Earnings per Ordinary share (7):
Revenue Return 3.16p 2.98p 4.45p
Capital Return (16.44p) (8.17p) (2.75p)
Total (13.28p) (5.19p) 1.70p
Dividends*
First interim 2.45p 2.40p 2.40p -
Second interim - - 2.05p -
Total 2.45p 2.40p 4.45p -
* The Company declares dividends in respect of a financial year in July and
January for payment at the end of the following August and February. The first
interim dividend for the year ending 30 November 2023 was declared on 11 July
2023 and will be paid on 31 August 2023 to shareholders on the register on 4
August 2023. The shares will go ex-dividend on 3 August 2023. The second
interim dividend will be declared in December 2023 for payment in February
2024.
Note 1 The total return NAV performance for the period is calculated by
reinvesting the dividends in the assets of the Company from the relevant
ex-dividend date. Performance since inception has been calculated from the
initial NAV of 98p and the NAV on 31 May 2023. Dividends are deemed to be
reinvested on the ex-dividend date as this is the protocol used by the
Company's benchmark and other indices.
Note 2 The total return share price performance is calculated by
reinvesting the dividends in the shares of the Company from the relevant
ex-dividend date. Performance since inception has been calculated using the
original launch price of 100p to the closing price on 31 May 2023.
Note 3 The total return share price performance since inception includes
the value of the subscription shares issued free of payment at launch on the
basis of one for every five Ordinary shares and assumes such were held
throughout the period from launch to the final conversion date of 31 July
2017. Performance is calculated by reinvesting the dividends in the shares of
the Company from the relevant ex-dividend date and uses the launch price of
100p per Ordinary share and the closing price per Ordinary share on 31 May
2023.
Note 4 Chain linked benchmark is a combination of 3 benchmarks which have
been in operation over the period. From inception until 31 August 2016 the
Company's benchmark was the MSCI World Financials Index, which included Real
Estate as a constituent until its removal that year. From 1 September 2016 to
23 April 2020 the benchmark was the MSCI World Financials + Real Estate Net
Total Return Index. From 23 April 2020, the benchmark changed to MSCI ACWI
Financials Net Total Return Index (in Sterling) due to the Company's exposure
to emerging market equities and its limited exposure to real estate equities.
Note 5 Dynamic average of open ended funds in the Lipper Financial Sector
Universe which comprised 56 open ended funds in the period under review.
Note 6 The total return NAV performance since the Reconstruction is
calculated by reinvesting the dividends in the assets of the Company from the
relevant ex-dividend date. The new performance fee period runs from the date
of the Reconstruction. The opening NAV for the performance fee of 102.8p is
the closing NAV the day before the tender offer was completed.
Note 7 Refer to Note 3 of the notes to the Financial Statements below
for more details.
~See Alternative Performance Measure below.
Data sourced from HSBC Securities Services Limited, Polar Capital LLP, MSCI
and Lipper.
For further information please contact: Simon Cordery, Chair Tel: 020 7227 2700
Polar Capital Global Financials Trust Plc
Jumoke Kupoluyi, Company Secretary Tel: 020 7227 2700
Polar Capital Global Financials Trust Plc
Chair's Statement
Dear Shareholders,
On behalf of the Board, I am pleased to provide you with the Company's Half
Year Report for the six months to 31 May 2023. This is my first report to you
as Chair of the Company and I would like to express my sincere thanks to
Robert Kyprianou who previously chaired the Company from its launch in 2013
until his retirement from the Board earlier this year.
The past six months have been a most challenging period for investors in many
asset classes as major economies and central banks adjust to a higher
inflationary environment and the highest interest rates for a decade. Global
equity markets have struggled for direction and sectors, such as those your
company invests in, have had a particularly difficult time. We have also
witnessed a number of individual bank failures, notably Silicon Valley Bank in
the US and Credit Suisse in Europe, which had a knock-on effect on bank share
prices worldwide.
These failures brought back painful memories of the Global Financial Crisis
and understandably, investors became cautious. As the dust settles and
valuations are reappraised against the very positive fundamentals we expect
opportunities will present themselves and investors will become interested in
the sector once again.
Performance
The Company marginally outperformed its benchmark in the period and for the
six-month period to 31 May 2023 the Ordinary Share NAV total return
performance was -8.1% compared to a decrease of 8.4% in the Company's
benchmark (MSCI ACWI Financials Net Total Return Index in sterling) over the
same period. Since the Company's reconstruction on 22 April 2020 to the end of
the period under review, the NAV total return per Ordinary Share was 59.3%
compared to the benchmark performance of 53.1%.
As described later in the Investment Manager's report, financials as a sector
underperformed the wider market. Rising interest rates, persistently high
inflation and a number of bank failures took their toll. US banks, which are a
big component of our portfolio, were particularly negatively affected, albeit
we had only a limited exposure to the failures via a modest holding in Silicon
Valley Bank. Outside of banks, other financial sectors performed better with
insurance and fintech adding value while there were more mixed results in
diversified financials.
Further information on investment performance can be found within the
Financial Highlights and the Investment Manager's Report.
Share Issuance and Buybacks
In contrast to this period last year, market headwinds (including bank
failures, the continued conflict in Ukraine, high inflation rates, reversal of
QE and increasing interest rates) have meant the Company's shares have tended
to trade at a meaningful discount to Net Asset Value (NAV). While the shares
of many investment trusts are experiencing similar discounts, the Board has
been proactively and opportunistically buying in shares. These buy-ins,
executed at substantial discounts, are accretive to NAV and the shares can be
re-issued from the treasury account when market conditions allow. This
approach is consistent with the latter half of 2022.
From the end of November 2022 to 31 May 2023, the Company had bought back a
total of 5,319,000 Ordinary shares, all of which were placed into the treasury
account.
Since the period end to 7 July 2023, the latest practicable date, the Company
bought back a further 2,400,500 shares at an average discount to the live NAV
at the time of transaction of 10.6%. These have also been placed into
treasury.
Board Succession
As reported in the last Annual Report, Susie Arnott and Angela Henderson
joined the board in December 2022 and, following these appointments, Robert
Kyprianou retired from the board in March 2023. We believe the Board, which
now comprises four members, has the requisite depth and breadth of skills to
oversee the Company. We are aware that we do not fully meet the FCA Diversity
recommendations in that we do not have an ethnically diverse individual on the
Board. It is particularly challenging to meet all of the recommended diversity
criteria with a small number of board members, and through the recruitment
process we meet diverse candidates and will continue to do so whenever board
vacancies arise.
Dividends
The Company's current dividend policy and aim with respect to the Ordinary
Shares is to pay two interim dividends each year, in February and August.
These interim dividends will not necessarily be of equal amounts. The ability
to continue the Company's dividend policy is significantly driven by income
receipts from our portfolio, and where these decline as a result of changes in
the policies of investee companies, changes in the composition of the
portfolio, regulatory intervention, or as a result of the currency exposure
underlying the portfolio, this could result in a lower level of dividend being
paid than intended or previously paid.
While markets have been difficult, the Board recognises the importance of the
dividend to many shareholders and has declared a first interim dividend for
the current financial year of 2.45p per share, a small uplift on the previous
financial year. The first interim dividend will be paid on 31 August 2023 to
shareholders on the register on 4 August 2023.
Gearing
Under the Articles of Association the Company may utilise an overall maximum
leverage limit of 20 per cent. of NAV at the time at which the relevant
borrowing is taken out or increased. In July 2022, the Company entered into a
new agreement with Royal Bank of Scotland ("RBS"), for a three-year revolving
credit facility ("RCF") in the amount of £50m, and two three-year term loans
for £15m and USD $18.4m respectively. At the period end, the term loans had
been fully drawn down; plus £30m and USD $12m had also been drawn down under
the RCF. As at 7 July 2023, the latest practicable date, the portfolio was 5.8
% geared.
Outlook
Our Investment Managers began the period under review with a cautiously
optimistic outlook - the portfolio was modestly geared and positioned to take
advantage of an improving interest margin backdrop as interest rates rose.
However, as events unfolded, they moved to a more defensive stance. At the
date of writing, the market seems to be fearing a repeat of the Global
Financial Crisis but our view is that this is unlikely to be the case. The
financial system is in far better shape than it was in 2008/09; balance sheets
and capital ratios have improved significantly while stock market valuations
are not reflecting this reality.
We remain cautious given the market uncertainty and investors unwillingness to
take risk. However, we believe the underlying fundamentals and valuations of
the sector are favourable and we remain positive on the sector. Our Investment
Managers are primed to take advantage of opportunities as and when they arise.
The sector looks cheap relative to history and little, if any, good news is
being priced in. As and when sentiment improves, we feel confident that our
portfolio will be a beneficiary.
Simon Cordery
Chair
10 July 2023
Investment Manager's Report for the half year ended 31 May 2023
Investment Review
Performance
Equity markets were marginally lower over the six months covered by this
report. Strong performance in the technology sector was offset by the impact
of stronger sterling. Having outperformed for two consecutive years,
financials not surprisingly underperformed as the collapse of a number of US
regional banks and the forced sale of Credit Suisse to UBS Group led to a
sharp sell-off in banking shares.
Consequently, US financials were very weak over the period under review.
Conversely, Japanese and European financials, (notwithstanding the turmoil
around Credit Suisse), stood out for their positive performance. Asian
financials were weaker than expected, following the reopening of China from
its zero-Covid policy which provided less of a support to economic data than
had been expected.
US government bonds were largely unchanged as a resilient labour market and
stronger than expected economic data challenged the narrative that inflation
and interest rates had peaked, and would quickly lead to more accommodative
monetary policy. Against this, the UK, Japanese and to a lesser extent German
government bonds were weaker, in the UK due to inflation coming in above
expectations.
Against this background, the Trust's net asset value fell 8.1% while its
benchmark index, the MSCI All Country World Financials Index, fell 8.4% and
the MSCI All Country World Index fell 0.3%. The Lipper open-ended peer group
of financial sector equity funds fell by 9.2% while the Markit iBOXX
Contingent Convertible AT1 Index, an index tracking the performance of
subordinated bank bonds, fell by 9.6% (in local currency terms) following the
Credit Suisse takeover which saw similar bonds zeroed.
An overweight position in US banks and gearing were drags on performance but
this was more than offset by our holdings in payment companies and fixed
income and good stock selection within our bank holdings. For example, we had
no holdings in Credit Suisse, First Republic Bank or Signature Bank and only a
very small holding (0.3%) in Silicon Valley Bank (SVB) which was sold for an
immaterial loss on the announcement of its capital raise, prior to its
failure.
Sector Review
Banks
Negative sentiment around the outlook for growth weighed on bank stocks over
2022 due to concerns about the impact on their profitability from a downturn
and this has continued into 2023. Nevertheless, bank shares performed well
initially in the period as earnings expectations continued to rise on the
increase in interest rates feeding through to higher net interest income - the
income they generate from the assets they hold (ie loans and securities),
relative to what they pay out to depositors and other sources of funding.
However, the offset to this is that due to higher interest rates, banks are
sitting on unrealised losses on their securities portfolios from holdings they
bought when interest rates were lower. This was not new news. However, the
announcement by SVB on 8 March that it would be selling a portfolio of its
securities at a loss while at the same time aiming to raise capital to
strengthen its balance sheet unnerved both investors and depositors. Despite
initial support for the capital raise, the loss of US$42bn in deposits on that
day led to support being pulled and ultimately the bank's collapse.
Signature Bank was foreclosed two days later as it also suffered significant
deposit outflows. While the bank was better known as a New York commercial
real estate lender, it is believed that its exposure to crypto assets via its
Signet payments platform unsettled depositors. This was followed shortly by
the failure of Silvergate Bank, a much smaller bank than SVB and Signature
Bank, with a much larger relative exposure to the crypto industry.
First Republic was the last of the four US banks to go into foreclosure,
despite a JP Morgan bank-led consortium injecting US$30bn of deposits into the
bank. First Republic was a business model focused on lending to high net worth
and aspirational clients, which had seen phenomenal growth on the back of its
customer service. It was ultimately bought from the Federal Deposit Insurance
Corporation by JP Morgan.
Credit Suisse, which had seen large outflows of deposits in the last few
months of 2022, saw further outflows following the collapse of SVB. Its annual
report alluded to "material weakness" in its internal controls and a poorly
timed or misunderstood statement from their largest shareholder that they
would "absolutely not" put more capital into Credit Suisse knocked sentiment
further. Despite support from the Swiss National Bank and its regulator
stating the bank was solvent, it was forced into a sale to UBS Group the
following weekend.
The decision by Swiss regulators to write-down Credit Suisse's AT1 bondholders
to zero, which required emergency legislation, while equity investors were
not, resulted in sharp falls in similar bond issues by other banks. Regulators
in Europe, UK, Hong Kong, Singapore and Canada announced they would stand by
the creditor hierarchy in contrast to the actions of Swiss regulators, which
put a floor under bond prices.
Not surprisingly, these events led to a sharp sell-off in bank shares, in
particular other smaller US regional banks that were seen as vulnerable due to
weaker capital. Actions by US authorities appeared to have little impact as
concerns around regional banks' exposure to commercial real estate exacerbated
share price falls.
However, as Federal Reserve data suggested that deposit flows stabilised
within a few weeks and PacWest, a Californian bank that had been at the centre
of the sell-off, stated that it had seen inflows of deposits, US bank shares
saw a partial recovery. Asian, European and other bank shares initially
suffered falls in share prices but stabilised quickly as the issues were seen
to not be systemic.
Insurance
With the extraordinary events in the banking sector, news flow elsewhere in
the sector came in a distant second. Unsurprisingly against this background,
the insurance subsector outperformed, reflecting its defensive
characteristics. It benefitted from the higher interest rate tailwinds and
therefore higher investment income as well as improving underwriting returns,
i.e. higher profitability.
There was volatility in the subsector as investors fretted over its exposure
to US regional banks and Credit Suisse. Within that, some life assurance
companies have higher exposure to commercial real estate, which has come under
scrutiny and therefore suffered weakness in share prices, but, for the vast
majority of the sector, exposure was negligible or non-existent.
In 2022, the reinsurance sector saw some companies reduce the amount of
capital they were willing to put at risk, reflecting the poor level of
profitability over the preceding few years even though reinsurance rates had
been increasing. In particular, the increased cost of claims from so-called
'secondary perils', floods and hailstorms, as well as higher catastrophe
losses from larger events such as Hurricane Ian which hit Florida in September
2022, generating estimated insurance losses of around US$60bn, the second
costliest hurricane on record, impacted profitability.
Consequently, with the drop in supply of capital underpinning the reinsurance
sector but with demand unchanged at best, reinsurance rates rose sharply in
January, estimated by Howden, an insurance broker, to be 37% on average.
Furthermore, the attachment points, i.e. the amount of loss born by an insurer
before a reinsurer covers the cost, also increased. The impact of this is that
either insurance companies would not be able to pass on losses for less costly
events or the amount they would be able to recover would be lower.
This repricing of the reinsurance market resulted in the share prices of
reinsurers rising. Nevertheless, some share prices did suffer from
profit-taking towards the end of the period on the back of Everest Re, a US
reinsurer, raising US$1.3bn in capital to take advantage of the more
attractive opportunity to put capital at risk, followed by RenaissanceRe's
acquisition of Validus from AIG, which also led them to raise capital to pay
for the acquisition.
Diversified financials
The diversified financials sector consists of a wider group of companies -
including trust banks, investment banks, stock exchanges, asset managers,
information services companies and consumer finance companies - and
performance reflected that. As a generalisation, investment banks and trust
banks were weak, with Charles Schwab the hardest hit as investors were
concerned about its balance sheet and the impact of the outflow of deposits on
its earnings.
Asset managers also saw a wide dispersion of returns. Alternative asset
managers have performed extremely well in recent years but have come under
pressure over the past year due to concern around fundraising and the impact
on performance fees from lower returns. Blackstone, the largest such company,
came under pressure regarding a jump in redemption requests on its non-traded
REIT (real estate investment trust). Nevertheless, those with higher exposure
to private credit strategies have performed well on the expectation that
demand for private credit will be more resilient.
Consumer finance companies also held up well, reflecting the strong jobs
market and household savings (outside those on the lowest income) despite
concerns around an imminent downturn. Information services companies were
mixed, with S&P Global and Moody's performing well but MSCI being weak.
Berkshire Hathaway also performed reasonably well reflecting its defensive
positioning with exposure to the likes of Apple and large insurance businesses
offsetting its more economically sensitive businesses.
FinTech
FinTech companies performed well over the six months; valuations enjoyed a
recovery following sharp falls in 2022 resulting in less downside risk for
investors, while revenues remained resilient, especially for the more
established businesses. Payment companies also benefited from the stronger
than expected performance of technology shares. At the end of the period, MSCI
designated that payment companies (the largest being Visa and MasterCard),
would move from the technology sector back to the financial sector and
consequently now represent 11% of our benchmark.
Investment Activity
At the beginning of the period, we retained a constructive view of the outlook
for financials and, notwithstanding concerns around the impact from a slowdown
in economic activity and potential recession, we believed that the sector
would weather it well. However, with the issues in the US regional banks, we
reduced risk, with gearing only at a moderate level and the mix of holdings
reflecting that relative cautiousness by, for example, increasing our exposure
to fixed income securities following the volatility in the UK gilt market in
October 2022.
Our exposure to Asia continues to focus on the faster growing economies of
India and Indonesia, with the portfolio's largest holdings in these countries
being HDFC Bank and Bank Central Asia. We continue to have no exposure to
Chinese state banks, but in the first few months we increased our exposure to
the region to benefit from the reopening of China by adding to holdings in
Hong Kong Clearing & Exchanges, BOC Hong Kong, AIA Group and Prudential.
However, as economic data coming out of Asia has disappointed, we have
subsequently pulled back some of that exposure.
At the start of the period we had a mid-single-digit percentage exposure to
small and mid-sized US regional banks, including Cullen/Frost Bankers,
Enterprise Financial Services and East West Bancorp. This had fallen from
around a low double-digit exposure a year ago as we had been reducing our
positions due to concerns on capital - higher deposit costs would impact
profitability - and also due to their higher exposure to commercial real
estate that would make them more sensitive to a US recession.
We added to holdings in European banks including AIB Group and Nordea Bank
while starting new positions in BNP Paribas and Intesa Sanpaolo as we see them
continuing to benefit from higher interest rates. New holdings were also
bought in Intermediate Capital Group and Ares Management, both alternative
asset managers that have significant private credit strategies which we
believe will be beneficiaries of the much more attractive environment for
credit strategies with the backup in bond yields.
Following the collapse of SVB, we made more material changes to the portfolio,
selling our remaining holdings in small and mid-sized regional banks. We
believe the headwinds facing US regional banks in the shorter term will
probably cap any rally in their shares until there is greater clarity on their
longer-term profitability following recent events. We prefer increasing our
exposure to larger US banks, albeit overall leaving the portfolio underweight
in US banks relative to the benchmark.
We bought new holdings in American Express and took the opportunity to add to
our fixed income holdings following the write-down of Credit Suisse's AT1
bonds. We bought new holdings in AT1 bonds issued by AIB Group, BNP Paribas,
Caixabank and Santander among others. We added selectively to our payment
exposure, purchasing a new holding in Adyen. The net effect of these changes
was for gearing to drop to 2.8% at the end of May.
Outlook
Bank failures
Why did so many banks fail in quick succession when the banking sector is so
much better capitalised, with significantly greater levels of liquidity and no
signs of stress? Ultimately, the catalyst for all of them was a sharp outflow
of deposits, similar to that seen during the global financial crisis.
Critically, this time around has not been about toxic assets on weak bank
balance sheets as it was then - arguably quite the opposite.
SVB, which was a huge beneficiary of growth in venture capital funding for the
technology sector over recent years, failed to hedge the interest rate risk on
its large portfolio of US Treasuries and mortgage-backed securities it had
built up from the inflow of deposits into the bank. Therefore, as interest
rates rose, this led to large unrealised losses which were a multiple of those
for any other bank, making it very vulnerable to any loss of confidence.
Signature Bank was almost unique for a bank, having significant exposure to
the crypto industry via a payments platform it owned. This resulted in
significant inflows of deposits and, while these were not quite on the scale
seen at SVB and therefore did not leave the bank sitting on similarly-sized
losses, it had been under pressure over the past year as these deposit flows
reversed. However, the failure of SVB along with continued negative news flow
around crypto was sufficient to start a deposit flight in short order.
First Republic had a very conservative risk appetite that was reflected in its
loan losses being around one tenth of its peers due to its high net worth
customer base, attracted to the bank by its unparalleled customer service
reflected in a net promoter score significantly above banking peers. However,
not dissimilar in some respects to SVB, the bank took significant unhedged
interest rate risk in its mortgage book and was therefore sitting on mark to
market losses on these mortgages should it ever need to sell them.
Similarly, there were never any material concerns about the assets on Credit
Suisse's balance sheet, especially after it was strengthened by a CHF 9.7bn
equity raise in October. However, weak profitability and risk management - its
2021 Annual Report had 12 pages dedicated to litigation risk - ultimately put
paid to the bank staying independent as, even though it had close to CHF 100bn
of capital that would need to be burnt through before depositors lost a cent,
the bank had lost the confidence of its investors and depositors following a
stream of negative news.
Importantly, all four stood out in having a high exposure to uninsured
depositors ie depositors whose bank deposits were not insured by a
governmental agency. For example, the three US banks with the largest
concentration of uninsured deposits as a percentage of total deposits were
First Republic, Signature Bank and SVB, with the first at 67% and the other
two at close to 90%. This compares to a median for the US banking sector of
approximately 40% at the time of their failure. First Republic was in the
strongest position of the three but that was not sufficient to prevent a bank
run.
This is not GFC II
We do not see this as GFC (global financial crisis) II, as the profitability
of the banking sector is vastly improved with the rise in interest rates and
the banking system has not been taking on significant risk in recent years.
Critically, outside the US, large banks are effectively obligated by
regulators to hedge their interest rate risk and are penalised with higher
capital requirements if they do not do so. Consequently, they do not have the
vulnerabilities we have seen with US regional banks that have suffered deposit
outflows.
The report by the Federal Reserve into SVB's failure states: "Silicon Valley
Bank failed because of a textbook case of mismanagement by the bank. Its
senior leadership failed to manage basic interest rate and liquidity risk
and Federal Reserve supervisors failed to take forceful enough action. It
goes on to highlight that rules around the regulation of smaller US regional
banks which were relaxed under the Trump administration had played their part.
As a result, US regional banks are facing increased regulation, likely around
capital, liquidity and stress tests which will add significantly to costs.
Furthermore, because of the outflow of deposits from the banking system to
money market funds as savers seek better interest rates on their savings,
regional banks are having to pay up for deposits which is impacting their
profitability. First quarter results highlighted that larger US banks were
beneficiaries of this outflow, with JP Morgan even upgrading its guidance for
higher net interest income.
Furthermore, risks around commercial real estate, especially offices which
have been impacted by the post-pandemic work-from-home trend, has also weighed
on sentiment. The drop in occupancy levels in large cities such as San
Francisco has exacerbated the fall in office property values. However, while
US regional banks have significant exposure to commercial real estate, the
largest is to multi-family properties, ie apartment blocks, where rents have
been increasing, while their exposure to office property is on average around
low single-digit percentage points which we see as very manageable.
Opportunity
Valuations for banks and insurance companies have fallen significantly and
banks are trading in the cheapest decile of earnings multiples since the
global financial crisis. Insurance companies are also trading close to their
lowest quartile. That reflects pessimism about the prospects for the sector.
We do not believe this is warranted.
Across the sector there will be banks and other financials that benefit from
the US regional banking crisis. In the short term it is HSBC Holdings, First
Citizens, New York Community Bancorp and JP Morgan that have been able to pick
over the bones of the banks that failed, which we expect will turn out to be
accretive acquisitions. Alternative asset managers, where we have exposure,
have also highlighted the opportunity to step in and help buy assets from
regional banks looking to raise capital. A recent example is Ares Management
purchasing $3.5bn of loans from PacWest.
At Berkshire Hathaway's annual general meeting, Warren Buffett highlighted
that he saw insurance as one of the few areas where they expect to grow
earnings over 2023 against a more difficult economic background. We have
sympathy for that view which is why we are keeping some of our powder dry for
when we feel the risk/reward justifies increasing leverage from its current
level. Consequently, we remain overweight Indian and European banks, payment
companies (which we have increased) and non-life insurers as well as a number
of other well-positioned Asian financials.
Nick Brind, John Yakas & George Barrow
10 July 2023
Note
We would draw shareholders attention to
www.polarcapitalglobalfinancialstrust.com for monthly factsheets, regular
investment commentary and portfolio updates. *index performance figures are
total return in Sterling.
Full Portfolio
Market Value £'000 % of total net assets
2023 2022 Stock Sector Geographical Exposure 31 May 30 November 31 May 30 November
2023 2022 2023 2022
1 (1) JP Morgan Chase Banks North America 31,583 30,627 6.5% 5.7%
2 (13) Visa Financial Services North America 23,449 11,108 4.8% 2.1%
3 (18) Mastercard Financial Services North America 21,662 9,805 4.5% 1.8%
4 (5) HDFC Bank Banks Asia (ex-Japan) 20,391 21,022 4.2% 3.9%
5 (4) Berkshire Hathaway Financial Services North America 17,904 21,302 3.7% 3.9%
6 (3) CHUBB Insurance Europe 16,452 22,493 3.4% 4.2%
7 (7) HSBC Holdings Banks United Kingdom 16,266 14,656 3.4% 2.7%
8 (17) Bank Central Asia Indonesia Banks Asia (ex-Japan) 11,711 9,890 2.4% 1.8%
9 (8) AIA Group Insurance Asia (ex-Japan) 11,094 13,874 2.3% 2.6%
10 (6) Wells Fargo Banks North America 10,970 20,754 2.3% 3.8%
Top 10 investments 181,482 37.5%
11 (12) Sumitomo Mitsui Financial Banks Japan 10,818 11,789 2.2% 2.2%
12 (2) Bank of America Banks North America 10,439 25,887 2.2% 4.8%
13 (21) AIB Group Banks Europe 10,432 8,949 2.1% 1.7%
14 (14) Arch Capital Insurance North America 10,090 10,533 2.1% 1.9%
15 (19) Bank Rakyat Banks Asia (ex-Japan) 9,795 9,183 2.0% 1.7%
16 (15) Marsh & McLennan Insurance North America 8,134 10,041 1.7% 1.8%
17 (27) Morgan Stanley Financial Services North America 8,089 7,558 1.7% 1.4%
18 (22) Beazley Insurance United Kingdom 7,879 8,909 1.6% 1.6%
19 (-) American Express Financial Services North America 7,612 - 1.6% -
20 (11) Toronto-Dominion Bank Banks North America 7,588 12,439 1.6% 2.3%
Top 20 investments 272,358 56.3%
21 (40) Nordea Bank Banks Europe 7,256 5,502 1.5% 1.0%
22 (34) Royal Bank of Canada Banks North America 6,947 5,858 1.4% 1.1%
23 (28) Indusind Bank Banks Asia (ex-Japan) 6,614 6,898 1.4% 1.3%
24 (49) CaixaBank Banks Europe 6,571 4,851 1.4% 0.9%
25 (10) PNC Financial Services Banks North America 6,465 13,112 1.3% 2.4%
26 (9) DBS Group Banks Asia (ex-Japan) 6,344 13,200 1.3% 2.4%
27 (35) Tisco Financial Banks Asia (ex-Japan) 6,278 5,805 1.3% 1.1%
28 (47) S&P Global Financial Services North America 6,214 4,923 1.3% 0.9%
29 (-) BNP Paribas Banks Europe 5,765 - 1.2% -
30 (29) Intact Financial Corporation Insurance North America 5,702 6,836 1.2% 1.3%
Top 30 investments 336,514 69.6%
31 (-) London Stock Exchange Financial Services United Kingdom 5,685 - 1.2% -
32 (42) Hannover Rueck Insurance Europe 5,684 5,456 1.2% 1.0%
33 (16) DNB Bank Banks Europe 5,470 9,896 1.1% 1.8%
34 (56) Axis Bank Banks Asia (ex-Japan) 5,457 3,789 1.1% 0.7%
35 (32) Prudential Insurance United Kingdom 5,415 6,402 1.1% 1.2%
36 (-) Intesa Banks Europe 5,308 - 1.1% -
37 (31) The Travelers Companies Insurance North America 5,264 6,484 1.1% 1.2%
38 (26) Sampo Insurance Europe 5,065 7,909 1.0% 1.4%
39 (-) Adyen Financial Services Europe 4,941 - 1.0% -
40 (-) Renaissancere Insurance North America 4,849 - 1.0% -
Top 40 investments 389,652 80.5%
41 (54) Ares Management Financial Services North America 4,819 4,236 1.0% 0.8%
42 (30) Standard Chartered Banks United Kingdom 4,806 6,552 1.0% 1.2%
43 (52) Macquarie Financial Services Asia (ex-Japan) 4,637 4,644 1.0% 0.9%
44 (46) Lancashire Insurance United Kingdom 4,475 5,024 0.9% 0.9%
45 (45) Allianz Insurance Europe 4,240 5,078 0.9% 0.9%
46 (36) Hong Kong Exchanges and Clearing Financial Services Asia (ex-Japan) 4,200 5,746 0.9% 1.1%
47 (41) MSCI Financial Services North America 4,058 5,497 0.8% 1.0%
48 (50) Hong Leong Bank Banks Asia (ex-Japan) 3,913 4,775 0.8% 0.9%
49 (57) Ares Capital Financial Services North America 2,963 3,393 0.6% 0.6%
50 (60) International Personal Finance 9.75% 2025 Bond Fixed Income Fixed Income 2,950 2,563 0.6% 0.5%
Top 50 investments 430,713 89.0%
51 (-) Intermediate Capital Financial Services United Kingdom 2,907 - 0.6% -
52 (65) Lancashire 5.625% 2041 Bond Fixed Income Fixed Income 2,862 2,348 0.6% 0.4%
53 (59) Pension Insurance 7.375% Perp Bond Fixed Income Fixed Income 2,846 2,576 0.6% 0.5%
54 (80) Gresham House Financial Services United Kingdom 2,631 1,625 0.5% 0.3%
55 (61) Rothesay Life 4.875% Perp Bond Fixed Income Fixed Income 2,450 2,548 0.5% 0.5%
56 (-) Bank of Cyprus Banks Europe 2,420 - 0.5% -
57 (69) AIB Group 6.25% Perp Bond Fixed Income Fixed Income 2,411 2,056 0.5% 0.4%
58 (66) Moneybox (unquoted) Financial Services United Kingdom 2,408 2,310 0.5% 0.4%
59 (62) Legal General Group 5.625% Perp Bond Fixed Income Fixed Income 2,355 2,542 0.5% 0.5%
60 (67) IG Group 3.125% 2028 Bond Fixed Income Fixed Income 2,266 2,284 0.5% 0.4%
Top 60 investments 456,269 94.3%
61 (63) Golub Capital Financial Services North America 2,244 2,465 0.5% 0.5%
62 (64) VPC Specialty Lending Investments Fixed Income Fixed Income 2,239 2,428 0.5% 0.4%
63 (73) Societe Generale 5.375% Perp Bond Fixed Income Fixed Income 2,018 1,978 0.4% 0.4%
64 (71) Riverstone Credit Opportunities Fixed Income Fixed Income 1,981 2,026 0.4% 0.4%
65 (70) Aviva 6.875% Perp Bond Fixed Income Fixed Income 1,907 2,030 0.4% 0.4%
66 (68) Atom Bank (unquoted) Banks United Kingdom 1,889 2,241 0.4% 0.4%
67 (72) Barclays 8.875% Perp Bond Fixed Income Fixed Income 1,840 1,978 0.4% 0.4%
68 (76) Nationwide Building Society 5.75% Perp Bond Fixed Income Fixed Income 1,748 1,785 0.4% 0.3%
69 (75) BNP Paribas 7% Perp Bond Fixed Income Fixed Income 1,731 1,867 0.3% 0.3%
70 (79) Natwest Group 2.105% 2031 Bond Fixed Income Fixed Income 1,678 1,646 0.3% 0.3%
Top 70 investments 475,544 98.3%
71 (-) CaixaBank 8.25% Perp Bond Fixed Income Fixed Income 1,641 - 0.3% -
72 (81) Provident Financial 8.875% 2032 Bond Fixed Income Fixed Income 1,609 1,593 0.3% 0.3%
73 (-) CaixaBank 5.25% Perp Bond Fixed Income Fixed Income 1,601 - 0.3% -
74 (78) Rothesay Life 6.875% Perp Bond Fixed Income Fixed Income 1,583 1,675 0.3% 0.3%
75 (-) Royal Bank of Scotland 6% Perp Bond Fixed Income Fixed Income 1,502 - 0.3% -
76 (-) Banco Santander 4.75% Perp Bond Fixed Income Fixed Income 1,475 - 0.3% -
77 (85) Rothesay Life 5% Perp Bond Fixed Income Fixed Income 1,299 206 0.3% 0.0%
78 (82) Chesnara 4.75% 2032 Bond Fixed Income Fixed Income 1,276 1,275 0.3% 0.2%
79 (83) Shawbrook Group 9% 2030 Bond Fixed Income Fixed Income 1,243 480 0.3% 0.1%
80 (-) Quilter 8.625% 2033 Bond Fixed Income Fixed Income 1,220 - 0.3% -
Top 80 investments 489,993 101.3%
81 (-) Hellenic Bank 10.25% 2033 Bond Fixed Income Fixed Income 1,008 - 0.2% -
82 (-) VEF Financial Services Europe 974 - 0.2% -
83 (-) BNP Paribas 9.25% Perp Bond Fixed Income Fixed Income 921 - 0.2% -
84 (-) RL Finance 10.125% Perp Bond Fixed Income Fixed Income 502 - 0.1% -
85 (84) Jupiter 8.875% 2030 Bond Fixed Income Fixed Income 456 456 0.1% 0.1%
86 (-) Permanent TSB 13.25% Perp Bond Fixed Income Fixed Income 186 - - -
Total investments 494,040 102.1%
Other net liabilities (10,006) (2.1%)
Total net assets 484,034 100.0%
Note: Figures in brackets denote comparative rankings as at 30 November 2022.
Portfolio Analysis
Geographical Exposure* Benchmark weighting as at 31 May 2023** 31 May 2023 30 November 2022
North America 41.8% 42.9% 50.1%
Asia (ex-Japan) 18.3% 18.7% 19.8%
Europe 16.3% 16.6% 15.5%
United Kingdom 11.0% 11.2% 9.4%
Fixed Income - 10.5% 7.8%
Japan 2.2% 2.2% 3.2%
Other net liabilities - (2.1%) (5.8%)
Total 100.0% 100.0%
Sector Exposure*^ Benchmark weighting as at 31 May 2023** 31 May 2023 30 November 2022
Banks 44.8% 45.7% 60.1%
Financial Services 25.7% 26.4% 17.2%
Insurance 19.1% 19.5% 20.7%
Fixed Income - 10.5% 7.8%
Other net liabilities - (2.1%) (5.8%)
Total 100.0% 100.0%
Market Cap* Benchmark weighting as at 31 May 2023** 31 May 2023 30 November 2022
Large (>US$5bn) 94.7% 96.7% 98.7%
Medium (US$0.5bn - US$5bn) 3.5% 3.5% 5.9%
Small (