UK bank stocks are no bargain – here's a safer alternative
Britain's banking sector faces severe political risks. Switch into this global financials trust instead, says Max King

The sale after 17 years of the last of the government’s stake in NatWest has led some to claim that this was good news for the banking sector. The stock overhang has been removed, and the sale has got the state off its back, they say.
Don’t count on it. Instead, this could herald open season for the government on the UK’s banks, meaning higher taxes, more regulation and the endorsement of new crackpot compensation schemes dreamed up by disgruntled consumers and grievance-chasing lawyers.
More insidious still is the cunning plan by Reform to save £35 billion by the Bank of England (BoE) ceasing to pay interest on deposits held at the central bank by UK lenders. This proposal is so deluded that, almost inevitably, the government will adopt it.
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The banks would seek to mitigate the loss of income by removing their deposits from the BoE and either investing in short-term gilts or lending to the private sector at whatever interest rate they could get. The former would bring down yields in the short term, helping the government to finance its borrowing requirement; the latter would reduce private sector borrowing costs. The snag is that the BoE would lose control of market interest rates.
The stimulus to monetary growth would create a spiral of rising inflation and a weakening currency, with the Bank of England and government powerless to stop it. Banks would be trebly hit: by the loss of revenue, the boom leading to bust with multiple insolvencies, and by the lower valuation of their shares in foreign currency terms.
Investors should instead consider the Polar Capital Global Financials Trust (LSE: PCFT). Almost 90% of the trust’s assets are invested outside the UK: 40% in banks (JPMorgan is the largest holding at 7%), 18% in insurance and 38% in financial services such as Mastercard and Visa. The portfolio has returned 19% over one year, 54% over three and 118% over five. Since NatWest, Lloyds and Barclays have all performed considerably better than that, now might be a good time to switch out of UK financials and into PCFT.
Moving away from bank stocks
PCFT managers Nick Brind and George Barrow have significantly reduced their exposure to banks in the recent years – their allocation to the sector was 59% of the portfolio three years ago and 49% two years ago. “Some banks are great businesses,” says Brind, “but we see better opportunities elsewhere.”
“The sector has performed very well and valuations have risen but earnings have grown faster than the market,” he says. “When we started, 12 years ago, the sector was trading on a 15% discount to the broader market; now it’s on 12 times earnings or 11 times excluding the data-service companies such as Visa and Mastercard. This is a 30% discount to the market.”
Financials have been widely distrusted by investors since the 2008 financial crisis, but “banks have been forced to clean up their act, and a lot of risk has been shifted off-balance sheet. The financial system has much more capital and liquidity, household and corporate balance sheets have seen a significant strengthening, yet the sector remains unloved.”
The sector would benefit from lower interest rates and lighter-touch regulation in the US and Europe. “We believe it would take a severely negative macroeconomic scenario to end the sector’s relative outperformance,” says Brind.
PCFT is trading at a 5% discount to net asset value (NAV). It offers the chance to redeem at NAV every five years, and the latest redemption cut the market cap by more than 40% to £350 million. Fees have been reduced, and a revised dividend policy pays 4% of NAV yearly.
An equally compelling investment worth considering is Polar Capital’s Global Insurance Fund, which has returned 98% over five years and 223% over 10.
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Max has an Economics degree from the University of Cambridge and is a chartered accountant. He worked at Investec Asset Management for 12 years, managing multi-asset funds investing in internally and externally managed funds, including investment trusts. This included a fund of investment trusts which grew to £120m+. Max has managed ten investment trusts (winning many awards) and sat on the boards of three trusts – two directorships are still active.
After 39 years in financial services, including 30 as a professional fund manager, Max took semi-retirement in 2017. Max has been a MoneyWeek columnist since 2016 writing about investment funds and more generally on markets online, plus occasional opinion pieces. He also writes for the Investment Trust Handbook each year and has contributed to The Daily Telegraph and other publications. See here for details of current investments held by Max.
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