Bank on financial stocks with this investment trust
Banks, though not British banks, look set for a strong rebound, making this investment trust worth researching.
The banking sector has been a significant drag on the UK market. Since 2006, the All Share index has risen by 19% but the five banking constituents of the FTSE 100 have, on average, fallen by 70%. As Nick Brind, co-manager of the Polar Capital Global Financials Trust (LSE: PCFT), notes, this was not just the result of the financial crisis. Since mid-2013, the five have slipped by 30% while the All-Share has returned 46% and the MSCI Global Financials index 77%.
A difficult domestic market
It’s not hard to see why. With interest rates at zero, it is virtually impossible for UK banks to make sufficient margin to cover costs, bad debts and a reasonable return on capital. Fee income is under relentless pressure from specialist providers of insurance, investment advice and foreign exchange, competition in the commercial market is intense and investment-banking income has withered. Regulators stopped banks paying dividends in 2020 and their overall rate of corporation tax is 8% higher than standard. “UK banks are not a good guide to the opportunities in the sector,” says Brind.
Banks in the US and emerging markets have fared better so PCFT has prospered, returning 102% since mid-2013 and 54% since the trust survived a continuation vote at the cost of buying in 40% of its shares last April. This has led to an acceleration in relative performance, which has been 14% ahead of the global financial index since then. The shares now trade at a small premium to net asset value (NAV), enabling PCFT to reissue most of the shares it bought back. Assets have increased to £250m and though the yield has dropped below 3%, dividend growth is likely to resume this year.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Over 90% of PCFT’s portfolio is outside the UK; 63% is invested in banks, 14% in insurance, and 10% in “financial technology” (such as PayPal and Mastercard). Nearly half of assets are in North America and 20% in Asia ex Japan. The sector has started to outperform but Brind believes there is much more to go for.
“Banks underperformed in the pandemic by more than in the global financial crisis,” he says, “but the rise in loan losses has been muted while payments of deferred interest have resumed. US banks are incredibly well reserved so provisions are likely to be released in 2021-2022 , enabling a resumption of share buybacks.” A strong recovery in earnings is expected, helped by the steepening of the yield curve. “This is very good news for the sector as the performance of banks is highly correlated to bond yields.”
Rising interest rates bode well
A 1% rise in US interest rates, says Brind, causes bank earnings to rise 12% in year one and 20% in year two. The discount of share prices to book value for global banks has narrowed from 30% to 10% but Brind sees 20% upside in the US and 30% globally, with asset values boosted by the release of provisions as well as by earnings. Given how well the banks withstood this crisis, it is even possible, he thinks, that they could be rerated in a more benign regulatory environment.
Exposure to emerging markets has been reduced despite the structural growth opportunities and a sector that is “more profitable and more dominant than in developed markets”. Financial technology companies have benefited from an acceleration in the shift of transactions online while pricing in insurance markets is firm. Covid-19 losses are estimated at $60bn-$70bn but balance sheets are strong and valuations moderate.
Financials usually out-perform by 23% in the 12 months from market lows, says Brind, “but have barely outperformed since the Covid-19 low and have halved relative to the MSCI World index since 2006”. Given the encouraging outlook the trust is geared, with borrowings of 9% of net assets.
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.
-
Halifax: cheaper to rent first-time buyer houses than own them in ‘most parts’ of UK
Halifax’s data showed rent came in cheaper than monthly mortgage costs everywhere except the South West, London and Scotland.
By Henry Sandercock Last updated
-
Hargreaves Lansdown bumps up cash ISA with £25 cashback - does it beat the wider ISA market?
Just days before the end of the tax year, Hargreaves Lansdown has launched a £25 bonus for those who open a cash ISA on its savings platform. Does the bonus make it a competitive rate, and are you eligible for the cashback?
By Vaishali Varu Published
-
What to consider before investing in small-cap indexes
Small-cap index trackers show why your choice of benchmark can make a large difference to long-term returns
By Cris Sholto Heaton Published
-
Why space investments are the way to go for investors
Space investments will change our world beyond recognition, UK investors should take note
By Merryn Somerset Webb Published
-
Time to tap into Africa’s mobile money boom
Favourable demographics have put Africa on the path to growth when it comes to mobile money and digital banking
By Rupert Hargreaves Published
-
M&S is back in fashion: but how long can this success last?
M&S has exceeded expectations in the past few years, but can it keep up the momentum?
By Rupert Hargreaves Published
-
The end of China’s boom
Like the US, China too got fat on fake money. Now, China's doom is not far away.
By Bill Bonner Published
-
Magic mushrooms — an investment boom or doom?
Investing in these promising medical developments might see you embark on the trip of a lifetime.
By Bruce Packard Published
-
What pension providers don't tell you about your retirement money
Check the small print from your pension provider or risk losing thousands.
By Merryn Somerset Webb Published
-
Should you invest in sector funds?
Sector funds can be a useful way to fine-tune a portfolio or track a theme, but check what the index holds.
By Cris Sholto Heaton Published