Originally launched in 2009 as the Polar Capital Financials Income fund, the £67.5m portfolio changed its name on June 13 2014 to Polar Capital Income Opportunities to better reflect its income mandate.
The company stated: “Whilst the fund will primarily invest in financial stocks, the investment policy also permits and will continue to permit investment in non-financial stocks. Accordingly, the proposed change of name more accurately reflects this broader income remit.”
Originally launched in 2009 as the Polar Capital Financials Income fund, the £67.5m portfolio changed its name on June 13 2014 to Polar Capital Income Opportunities to better reflect its income mandate.
Manager Nick Brind, who has run the portfolio since launch, confirms the remit has not changed; it aims to provide a “very attractive income and play the recovery in financials primarily”.
He says the process involves a team of seven, which between them run five financial portfolios, adding that it is a very stock-specific approach. Although he says: “Financials, being largely cyclical businesses, mean you have to obviously have a top-down view and be very cognisant of what has been going on. Since the crisis it has been a lot more intensive to follow and research the sector because there have been a lot of regulatory headwinds.”
Mr Brind refers to the process as having a quality and a value bias, partly due to the nature of the fund being an income product. That said, the risk/reward indicator level of the fund rests at a level 5, according to its Kiid, just above the median of the spectrum, while ongoing charges are stated as 1.4 per cent.
Since launch in October 2009 to July 3 2014, the fund has delivered a respectable 54.04 per cent. Using the MSCI World Financials index for comparative purposes only, it has significantly outperformed the index return of 29.74 per cent in the same period, according to FE Analytics.
The fund’s one-year performance is a strong 10.97 per cent, beating the MSCI World Financials index return of 8.17 per cent, although with a wider income remit going forward comparisons with financial indices may no longer be truly appropriate.
The manager notes there have been only a few changes “at the margins” of the fund, including a reduction in its exposure to fixed debt securities in the past 18 months, purely on the basis they have performed so well for the portfolio.
“At one point the fund had roughly 55 per cent invested in fixed income; now it is down to the low 30s. It was really taking advantage of that opportunity, but now with compression in yields across the fixed income universe, the opportunity there has become a lot less attractive.”
Elsewhere, the portfolio has invested in one of the new challenger banks, OneSavings Bank, originally the Kent Reliance Building Society, which recently floated on the stock exchange.
“It is a great opportunity for some of these smaller banks to take market share. You’ve seen that historically, more focused smaller banks do tend to be better. They can grow much faster, with the caveat – as we saw during the crisis – that you’re at much greater risk if your underwriting standards are poor. But that is an opportunity we have participated in.”
The fund also has a small exposure to business development companies in the US, which lend to small- and mid-size US companies.
Looking ahead the manager remains positive on the financials sector globally, noting that European financials have performed very well, although the US less so.
“In the very short term, I suppose, the sector as a whole has probably underperformed in a sense, but I think that is mostly reflecting a degree of scepticism or caution about the rally in markets. People have pulled back a little bit as the sector has performed so well.
“But we’re still very positive. The market is still very cheap; it has been going through a transition, in a sense normalising as banks raised capital and rebuilt balance sheets. It is getting back to what it was before – a high-yielding and relatively less volatile sector than it has been.”
EXPERT VIEW
Darius McDermott, managing director, Chelsea Financial Services
“The Polar Capital Income Opportunities fund invests in both the equities and bonds of companies within the financial services sector, which sets it apart from many of its peers. It currently has about two-thirds of the fund in equities and a third in fixed income, favouring developed market equities and UK bonds. The Polar team is very bullish on the sector over the medium to long term, as evidenced by the recent launch of an investment trust in this area too. This is a well-resourced team with a lot of experience and a strong track record. The fund has traditionally had much lower volatility than other financial funds, a major benefit for a sector that is historically volatile.”
