29th May 2013
As millions of UK private investors mourn losses in once high flying dividend paying bank shares – the dead or severely wounded include Northern Rock, Lloyds Banking Group, Halifax-Bank of Scotland, Royal Bank of Scotland and Bradford & Bingley – few will consider upping stakes in big finance.
But buying when others remain in despair can be a smart move – the opposite of private investors buying into funds at market peaks. That’s the reasoning of managers Polar Capital, due to launch its Global Financials Trust in late June. This investment trust – or closed end fund – will buy into banks, insurers, asset managers and other firms in the sector on a worldwide basis.
“The trust is designed to take advantage of the misinformation, growth opportunities and potential for significant yield recovery in the world’s largest and most unloved sector – the banks and financial companies,” says Polar head of closed end fund sales John Regnier-Wilson. Banks still account for 53 per cent of the Bloomberg World Financials index and 22 per cent of world market value.
Whatever the UK government does with its shares in RBS and Lloyds – and the rumour mill suggests a disposal sooner rather than later, – the Polar fund’s key is its global remit. Only five per cent of the world’s banks are in trouble but the media concentrates on these. Problem-hit Cyprus banks are just 0.1 per cent of the banking scene. Emerging market and Asian banks have had few, if any, difficulties. But even in Europe and North America, banks are busy rebuilding solvency, if at the expense of staff cutbacks and tougher to get loans.
And once balance sheets look better, banks will return to dividend paying. The fund is a play on recovery, income and capital growth.
It’s a geared play. Financials tend to beat rising markets and plunge faster when stocks fall. Any recovery will be quick with most of the out-performance in the early years. So this is a high beta strategy – and not aimed at the cautious investor.
Polar’s previous investment trust launch was Healthcare in June 2010 – again an out of favour sector. But since then the total return for initial investors has topped 60 per cent. It is banking on this – plus the financials track record of managers John Yakas and Nick Brind.
The trust hopes to raise £150m, but without the big retail push investors seen with Fidelity China Special Situations (which has recovered much of it precipitous fall and now trades just five per cent under launch price).
But it comes with a complex fee structure. There is an annual 0.85 per cent charge, levied on the lower of market value and net asset value (the worth of the underlying holdings). And more controversially, the managers get a second fee if they outperform the MSCI World Financials Index. This will be measured and paid when the fund ends its seven year life – not every year or quarter. The idea, tested via soundings with brokers and advisers, is to prevent fund managers doing well for a short time and then quitting and running off with their remuneration.
Stephen Peters, analyst at stockbrokers Charles Stanley, was one of those whose opinions were sounded. Along with rivals such as Rathbones and Brewin Dolphin, his views on fees, dividends and other issues were sought in “pre-marketing” – promoting a fund with excessive costs could result in regulatory issues for brokers.
He says: “I’m agnostic on whether clients buy this or not. We rarely recommend sector specific funds although this one comes with a good pedigree. The fixed life (until May 2020) should ensure managers run this for the shareholders and not for themselves. It also tells the market that the shares will trade around their underlying value – especially as winding up approaches – rather than at a wide discount.”
He is more critical of the fees. “They are a little higher than I would like although being paid on the lower of market capitalisation and net asset value is a plus. Along with many others, I am not keen on performance fees as I do not see why managers should be paid extra for doing their job but the performance is over the life of the fund and there will be nothing for the managers if the net asset value falls below the 100p launch price. So if the index loses 50 per cent and the managers only lose 20 per cent, they cannot argue for a performance fee because they have outperformed.”
The initial dividend should be around three per cent – with growth prospects as the sector moves further away from its darkest days.
Polar’s line that the sector is cheap, and that investing in financials can help access Asian consumers is, according to Peters, “a well reasoned argument and while I can’t say if it is right or wrong, it will get traction with clients – ours tend to have few financials outside HSBC, Standard Chartered and one or two insurers and asset managers. We’ll have clients in at the launch but we’ll monitor the fund.”
Polar’s optimism is not shared everywhere. First State Investments has taken a far more cautious approach believing banks will not easily bounce back to health. Its Worldwide Equity Fund is distinctly underweight in financials – around 15 per cent against their 22 per cent exposure in the index.
Adrian Lowcock, who analyses investments at IFA Hargreaves Lansdown, is also cautious.
He says: “Financials were valued at end of the world levels and they are still low. It’s an area that will attract attention if stock markets continue to perform. Banks have cut costs and improved balance sheets but key issues include known unknowns such as bad debts, central bank support and political factors. If quantitative easing disappears, there could be fear and high volatility.”
Lowcock believes speciality funds only offer diversification prospects to those with bigger portfolios. “I would only suggest a few percentage points into this – or other – sector funds. Many already have financials exposure through general funds so they may not want this. The limited life is attractive, and we shall look at it but it is very geared into success, equity markets are uncertain with circumstances well outside any manager’s control. I think it is quite niche for retail investors.”
Prospectus issued 11 June
Final date for subscription 26 June