Polar Capital Global Financials Trust — 3 videos in collection
In this Vantage interview, Tom Dorner, fund manager at Polar Capital Global Financials Trust, speaks to Neil Shah, executive director and market strategist at Edison Group. They discuss the trust's diversified global approach to financials and how higher interest rates have changed the operating environment for banks and insurers. Tom also explains why the trust favours European banks, payments companies and selected insurers, and covers M&A, deregulation and AI as themes in the sector. The conversation ends with the trust's recent and longer-term performance against its benchmark and global equities.
What is Polar Capital Global Financials Trust trying to achieve, and why should investors consider it for their portfolio?
Tom Dorner: As you said, my name's Tom Dorner, and I'm one of the portfolio managers on the trust. What the trust is trying to do is give investors a diversified exposure to global financials. It's run by a team of financials experts that have been doing it for a long time, and it's very actively managed.
It gives you genuinely diversified exposure. For example, it's not just the biggest banks in the world, and that's about half of the portfolio. We go well beyond that to give you exposure to insurance companies, asset managers, exchanges and the like. It's genuinely diversified by sector, and it's a really global portfolio as well, with about 90% of the assets outside the UK.
We're really pleased with it, and we think it's a really differentiated way to get exposure to financials.
What are the main macro factors affecting the financials sector in a rising interest rate environment?
Tom Dorner: The increase in interest rates is perhaps the most important driver in recent years. You might argue that this is a structural change in the operating environment, and, if you combine it with the fact that global GDP growth has been pretty good, it's quite a positive backdrop for financials. We've been saying this to clients for some time. The return-generating capacity of the industry is a lot greater with higher interest rates.
There are, of course, other external factors, like higher long-term bond yields or geopolitics. But one of the main messages we'd like to leave you with is that the sector's fortunes are much more in its own control than they have been for a long time. It's much less beholden to external factors. That's because insurance companies and banks really got their house in order during the lower interest rate environment after the financial crisis.
Now they've come out of that into a higher interest rate environment in a much better position. So, it's a really structurally better operating environment than it has been for some time.
Which areas of financials is the trust favouring, by both geography and sector?
Tom Dorner: To name a couple, we've been quite bullish on European banks for some time, and they've continued to work very well. The sector's getting pretty consistent earnings upgrades, capital positions are strong and shareholder returns in terms of dividends and share buybacks are very attractive. What's happened more recently is that you've started to see loan growth, which has been pretty scarce for a number of years. For example, about a month ago we were at a European financials conference not far from here, meeting a number of the management teams, and the message is resolutely positive. So that's an area we still like.
Within insurance, we've become a bit more selective. The reason for that is that the commercial insurance pricing environment's got a bit more challenging. So, what we've done is tilt the portfolio towards companies that are beneficiaries of consolidation, which is something that we expect to happen.
Maybe the final thing to flag is diversified financials. That's an area of the market where we've been looking for defensive companies with some improving operating trends, to help the portfolio be a bit more balanced. There we've been adding to companies like Visa and Mastercard, which got a lot cheaper earlier in the year on some overblown AI concerns, which are not that uncommon. So those are some of the areas that we like.
It is important to note that we have to be nimble, and we are very actively managing the portfolio. We're just at the beginning of the third-quarter earnings season, which will no doubt provide us with opportunities and surprises. We remain nimble, but those are some areas that we like at the moment.
What dominant themes, such as AI, is the trust focusing on across the financials sector?
Tom Dorner: There are a couple of things that we're paying attention to. If you take a step back, financials as a sector has actually performed very well for a number of years, but we're still quite bullish.
One thing we're bullish about, and that we think the market underappreciates, is M&A. Activity has really increased significantly in the last 18 months, among both banks and insurance companies. That's a way for industry participants to show that they still see attractive valuations in the sector, and it's something that we expect to continue.
Another thing that's been going on is a trend towards deregulation, particularly in the US but increasingly in the UK and in the rest of Europe. It's not a particularly exciting topic, but regulation has been a meaningful headwind for the sector in the period after the financial crisis. We think it's pretty exciting that it's turning from headwind to tailwind.
And then you referenced AI as well. There are live debates as to which companies and industries get disrupted. We're firmly of the view that many parts of financial services will gain efficiency from AI investment, and this is corroborated by all the management contact that we've had. It's also something that many companies are starting to provide disclosure on, to give you a sense of how much they can save in terms of costs going forward from AI.
Those are three things that we're very focused on, all of which we think are underappreciated by the market.
How has Polar Capital Global Financials Trust performed over the short and longer term compared with the financials sector and global equities?
Tom Dorner: It's a positive message. We had a good year relative to the benchmark last year. The trust is up almost 10% this year, which is about 1% ahead of the benchmark. So that's the backdrop.
We're pleased with the relative performance. There have been periods of volatility, but, generally, performance has been strong.
Talking a little bit about the performance of financials, over three and five years financials have quite meaningfully outperformed global equities, and we've been doing slightly better than that. That perhaps gets less attention than you might think because of the focus on technology and the like. But it's actually been a pretty good sector to be allocated to and quite diversifying too.
This transcript has been lightly edited for clarity and readability. Verbal fillers, false starts and minor repetitions have been removed from the interviewee's responses only. Punctuation, spelling and formatting have also been standardised in line with Edison house style. No substantive changes have been made to the meaning of the discussion.
