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32. Uncovering Trusts – Polar Capital Global Financials Trust (PCFT) – A unique trust specialising in the diverse financials sector
70 Plays2 days ago
In this episode, our director of content, investment trusts Milosz Papst provides an overview of specialist fund manager Polar Capital before moving onto a more detailed introduction to Polar Capital Global Financials Trust including its income and capital return objective. Listeners may not appreciate that financials is one of the largest global sectors, so we provide some context to the trust’s investment universe and what are the important considerations for potential investors. Milosz then takes a look at the trust’s portfolio including subsector exposures and important themes before highlighting some of the recent activity in the fund. He concludes by focusing on recent developments for the trust, namely a reduced fee structure and an enhanced dividend policy.
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About ‘Uncovering Trusts’
'Uncovering Trusts': is a podcast run by Edison analysts released every two weeks. Subscribe to hear analyst interviews on how investment trusts maximise returns while managing risks for investors.
About Edison:
Edison is a content-led IR business. We believe quality investment content should inform all investors, not just brokers. Our mission: engage and build bigger, better-informed investor audiences for our clients.
Edison covers 50+ investment trusts, read about them here: https://www.edisongroup.com/equities/investment-companies/
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Transcript
Introduction to Uncovering Trusts Podcast
00:00:05
Speaker
Welcome to Uncovering Trusts, a podcast by the Edison Group, a content-led IR business integrating analyst content, digital targeting, and investor engagement. Each episode will uncover the distinct features and latest developments of selected listed investment company.
00:00:21
Speaker
So tune in to find interesting investment ideas and stay on top of what's happening in the investment company sector.
Guest Introduction: Milos Pabst and Polar Capital
00:00:28
Speaker
I'm your host, Will Manuel, and today joined by Milos Pabst, Director of Investment Trust Content at the Edison Group, who will talk about the Polar Capital of Global Financials Trust, whose ticker is PCFT.
00:00:43
Speaker
Milos, thanks for joining us. Hi, Will. Great to be here. Great.
About Polar Capital
00:00:49
Speaker
So I think a good place to start is to tell our listeners about Polar Capital, because it's an interesting business model.
00:00:56
Speaker
Sure, um good idea. Specialist fund manager Polar Capital was founded in 2001. ah Since then, the company has grown steadily and at the end of March 2025 had more than £21 billion pounds of assets under management.
00:01:12
Speaker
Now, the firm's culture is collegiate and meritocratic and currently has 14 autonomous investment teams running a range of actively managed, predominantly equity funds.
00:01:23
Speaker
um Polar Capital's primary focus is performance rather than asset gathering, with the investment teams left to run their funds free from operational duties, which are carried out by specialists within the company.
00:01:35
Speaker
Importantly, to safeguard investment processes and some maximize return potential, Polar Capital manages the individual fund capacities, which is based on stock liquidity and investment teams trading pattern and client concentration.
00:01:50
Speaker
ah When a fund reaches an optimum size in terms of maintaining performance, further inflows are limited. And the capacity of all Polar Capital funds is under constant review. I would also highlight Polar Capital's heritage in managing investment trusts specifically.
Sector-focused Funds at Polar Capital
00:02:04
Speaker
The manager has three sector-focused funds. the The Technology Trust launched in 1996 and became Polar Capital's first investment trust mandate following the firm's foundation in 2001.
00:02:18
Speaker
This was followed by a healthcare-focused trust in 2010 and then the financials trust in 2013.
00:02:24
Speaker
Great, that's a useful bra background. ah So let's now move on to the Financials Trust, ah which is one of the three polar capital investment trusts, along with healthcare care and technology, as mentioned.
00:02:35
Speaker
Yeah, so Polo Capital established its financials franchise in 2010 when it acquired HIM Capital, formerly Hiscox Investment Management.
00:02:46
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It currently has around £650 million pounds of outstanding
Investment Strategy and Portfolio Goals
00:02:51
Speaker
management. um As I've just mentioned, the Global Financials Trust was launched in 2013 as financials is a large global sector that was ah you know trading at a relatively attractive valuation.
00:03:03
Speaker
And I would note that it is the only UK listed investment trust solely invested in financial stocks. It has three core managers, Nick Brind, George Barrow and Tom Derna, who along with other team members, Jack Deegan and Nabil Siddiqui, have a combined 100 years of investment experience.
00:03:20
Speaker
Nick and George were former HIM Capital employees, so have worked together for a very long time. and Okay. um And what ah what is the trust's objective?
00:03:32
Speaker
The team aims to generate a dividend income and capital appreciation from an actively managed portfolio of financial stocks that is diversified by size, sub-sector, geography.
00:03:43
Speaker
ah Typically, 90% of the portfolio is invested in non-UK equities and the managers can hold up to 10% of the portfolio um both in unlisted companies and other closed-ended investment companies.
00:03:56
Speaker
The Trust also maintains a fixed income allocation with no set minimum limits, allowing for a more unconstrained mandate. um The Trust's performance is measured against the MSCI ACWI Financials Net Total Return Index.
Financial Sector Opportunities
00:04:10
Speaker
Great. So can you tell us more about the global financial sector? ah First thing to know about the sectors that's, well, it is important as it is the second largest global sector after technology, making up around 18% of the MSCA All Countries World Index.
00:04:28
Speaker
It has a varied makeup, comprised of many different subsectors, including banks, insurance, payments and diversified financials. ah The latter includes businesses such as stock exchanges, asset managers and consumer finance companies.
00:04:43
Speaker
Some of these businesses are economically sensitive, such as banks, while others, including interest and payments, are less so. Now, looking at the trust benchmark, there are around 480 constituents. So as you can see, there are many investment opportunities in the financial sector.
00:04:58
Speaker
The managers comment that ah financial stocks have been an easy space not to own against a backrop a backdrop of strong performance for the technology sector. ah Financials does not get much coverage and fund managers tend to be underweight.
00:05:14
Speaker
The general perception is that the financial sector is dominated by banks, but actually they only make up 40%. Okay, that's interesting. um And what are some of the other sector considerations that global investors should take into account?
Diversification and Growth in Financial Stocks
00:05:28
Speaker
Yes, I would start by highlighting that financial stocks offer diversification versus growth stocks, which outperformed during the extended period of ultra low interest rates following the global financial crisis.
00:05:39
Speaker
As evidenced during COVID-19, balance sheets across the financial sector are extremely strong, which has facilitated a significant return of capital to shareholders via buybacks and dividends.
00:05:50
Speaker
However, the Trust's managers believe that the increase in profitability over the last few years um is not reflected in valuations. but There are also very attractive long-term growth trends within the financial sector, including increasing penetration of financial services in the emerging markets, shifts in payment trends, deregulation and and AI, which should lead to lower costs, um the rise of fintech and the democratization of investing.
00:06:16
Speaker
Now, drilling down in more detail, the financial sector return on equity has improved significantly since mid-2020 from around 8.5% to 12.5%, and strong profitability is expected to continue.
00:06:30
Speaker
um Importantly, the sector's outperformance has been due to earnings upgrades rather than multiple expansions. so Valuations remain very attractive, and the sector has strong earnings growth, which has continued into 2025.
Portfolio Composition and Focus
00:06:44
Speaker
Okay, so now can we turn to the trust portfolio and give us some details on that? Yeah, sure. um Well, the portfolio is broadly split 35% banks, 35% diversified financials, 20% insurance and 10% payments.
00:06:58
Speaker
um There are around 80 positions in the portfolio, which along with, um you know, familiar of value compound compounding names such as JPMorgan Chase, Progressive, ICE and Mastercard, there are some less well-known companies such as ken Canadian Property and Casualty Insurer Intact Financial and the general online brokerage and fintech company, Flatex De Giro.
00:07:19
Speaker
Compared with the index, the trust has a higher concentration in its top 10 holdings, around 34% versus around 25%, not surprising for an actively managed fund. up but just not surprising for an activity managedage fund The active share, which is an indicator that measures how the fund differs from the index, with 0% being full replication and 100% no commonality, stands at 71% for the trust.
00:07:44
Speaker
I see. So umm but what fees are currently represented in portfolio? Yes, so there are several themes the managers currently focus on. um Firstly, they hold US lenders, which they view as a key beneficiary of deregulation.
00:07:59
Speaker
um US lenders experienced a tighter regulatory environment following the global financial crisis, which slowed down the pace of M&A, but the managers expect this to change.
00:08:10
Speaker
Secondly, exchanges and platforms are beneficiaries of higher trading volumes and elevated stock market volatility, which the managers expect will continue under US President Trump, as we've experienced recently.
00:08:23
Speaker
There is also strong growth in the number of online trading accounts being opened. Thirdly, despite outperforming for the last three years, um European banks are still trading on a wide discount to the broader market while generating higher returns on equity.
00:08:39
Speaker
There are signs of loan growth being up, which is very important and may help towards these stocks being afforded higher valuation. The managers also emphasize insurers as a defensive and more profitable play.
00:08:52
Speaker
and Another theme are alternative asset managers benefiting from the growth of private markets. And the managers also look at emerging markets, given their structural growth opportunities, including an increase in financial services penetration from the current low levels and fintech innovation, which yeah I mentioned earlier.
00:09:10
Speaker
And finally, they explore opportunities in the payment sector amid growth in e-commerce and value added services. Great, thank you. um and Can you give us some examples of some recent portfolio activity?
Portfolio Repositioning Strategies
00:09:25
Speaker
Yes, of course. and There have been a series of changes to the portfolio in April as the managers repositioned the trust to reflect the near-term risks related to new U.S. tariffs. um They reduced exposure to U.S. financials and took steps to de-risk its regional allocation.
00:09:42
Speaker
um This included a reduction in U.S. banks such as Citigroup and consumer finance companies, including American Express. ah They also reduced exposure to capital market sensitive names such as Goldman Sachs.
00:09:54
Speaker
They reinvested the capital into more defensive stocks in the US, s most notably Bekshire Hathaway, and increased the allocation to quality Canadian banks, for instance, Royal Bank of Canada.
00:10:05
Speaker
In Europe, the managers added to their overweight position in trading platforms such as Plus500 and IG Group Holdings. due to factors I've just discussed. um The managers slightly reduced their overweight position in European banks ahead of the so-called Liberation Day and purchased food options to protect the portfolio against a potential weakness in the sector.
00:10:26
Speaker
The managers also seized the opportunity from elevated volatility to initiate positions in what they describe as long-term structural winners, and most notably London Stock Exchange Group and Finneco Bank.
00:10:39
Speaker
ah They also added some high quality emerging markets financials to which the trust had been significantly underweight. um The rationalists behind this move are easing liquidity conditions in several markets and the fact that domestically driven economies such as India are are relatively insulated from tariff threats.
00:10:58
Speaker
ah The managers initiated a position in the Indian HDFC Bank and the Latam Lander New Holdings. yeah Great. um
Trust Life and Policy Enhancements
00:11:08
Speaker
Thanks for that. And but what are the other important issues that current and potential investors need to know about ah Polar Capital Global Financials Trust?
00:11:18
Speaker
The trust initially had a seven-year life, but in April 2020, shareholders voted to extend its life indefinitely, subject to regular tender offers every five years at NAV minus costs.
00:11:31
Speaker
Following a review of the trust's fee arrangements, a more attractive tiered structure will be introduced, with effect from the 1st July 2025. The management fee will be 0.7% annum, to £500 million, and 0.65% above £500 million.
00:11:48
Speaker
while the current fee is a flat 0.7% of NAV. um the Fees will be lower if the if the trust trades at the discount to NAV, as for both tiers the basis for calculation will be 50% of NAV and 50% of the lower of market capitalization or NAV.
00:12:06
Speaker
ah Finally, the performance fee will be removed. um Also at the April 2025 AGM, the trust shareholders approved the board's proposals for an enhanced dividend policy. In the absence of unforeseen circumstances, there will be a regular quarterly dividend equivalent to approximately 4% of NAV per year, um which compares to the current yield of around 2.5%.
00:12:30
Speaker
Dividends will be paid from revenue and distributable capital reserves when they're required, and the new policy is effective from the start of FY26, which is the 1st of December 2025. This is an important development as the managers will not necessarily have to seek companies with an attractive yield, which may be at the expense of the trust's capital growth.
00:12:50
Speaker
And finally, the trust's fixed income allocation will become more tactical rather than a strategic element of the portfolio. Great. so i Thank you for this informative rundown on Polar Capital Global's Financial Trust.
Podcast Conclusion and Further Information
00:13:05
Speaker
I've most enlightened it. You've been listening to Uncovering Trust, a podcast by the Edison Group. If you want to find out more about Polar Capital Global Financial Trust and other investment companies that we cover, please visit www.edisongroup.com.