Article09 Jun 2026

Financials remain undervalued - May Trust Update

Nick Brind

Fund Manager

George Barrow

Fund Manager

Tom Dorner

Fund Manager

Market and Trust review

Equity markets continued to make new highs in May, led by the technology sector, although financials, along with many other sectors, have yet to recover their pre-Middle East war highs. Nevertheless, sentiment improved as oil and other commodity prices fell as the drawdown of oil inventories, reduced imports by China and demand destruction pushed back the date that the Strait of Hormuz could stay closed before having a greater impact on prices. Against that background, the Trust’s NAV (net asset value) rose 1.4% in the month, outperforming its benchmark index, the MSCI All Country World Financials Index, by 0.3%.

Europe was the main driver of positive relative performance over the month with the largest contributors being IG Group and Hiscox. IG Group rallied sharply on the back of upgraded earnings guidance. Hiscox benefited from speculation that Intact Financial, a Canadian insurance company which already has a large UK business following its acquisition of RSA Insurance in 2021, was running the slide rule over it. Conversely, not having a holding in Goldman Sachs Group, which performed well, as well as weakness in Hamilton Insurance Group and our broader life assurance holdings detracted from performance.

Investment banks and trading platforms

Investment banks and trading platforms were among the strongest performers in the financial sector during May and similarly over the past year. They have benefited from the volatility in markets and buoyant conditions across equity, fixed income and commodity markets. Elevated trading volumes have continued to drive income at both the major global investment banks and the specialist retail and institutional trading platforms. At a conference at the end of the month, Morgan Stanley, a holding in the portfolio, stated: “We’re on track to be near the record, if not breaching the record, of 2021. Corporate M&A is up like 62% year-over-year”, before going on to highlight that IPO (initial public offering) activity was up even higher.

Our modest underweight position, compared to the benchmark, in investment banks has been more than offset by a significant exposure to a number of the trading platforms, due to their more attractive valuation multiples, as well as an overweight to the larger, more diversified banks that have significant investment banking operations. Volatility remains elevated and this has helped underpin our structural investment case for having a significant exposure to a number of the trading platforms, such as IG Group, as a counterbalance to those companies that prefer calmer waters. The tailwind of increased retail participation in financial markets in Europe also offers a longer-term growth opportunity.

Asset managers

Traditional asset managers continue to outperform their alternative asset manager counterparts by a meaningful margin. The former benefited from the continued strength of equity markets, which automatically lifts the value of their assets under management, in some cases also helped by improving net inflows. We have a holding in Affiliated Managers Group which owns stakes in 40 asset management businesses including, for example, Artemis in the UK, although it also has significant exposure to alternative asset managers, such as AQR and Pantheon, where it has benefited from stronger flows of investor capital.

It was also a useful opportunity to see management teams push back on the AI disruption narrative that impacted a small number of companies in the sector

Notwithstanding continued positive fund flows, alternative asset managers remain under pressure, weighed down by persistent concerns around private credit. There have also been lower profit forecasts on the back of investor caution around the pace of capital deployment in uncertain market conditions – albeit one at odds with a market that is seeing increased M&A (mergers and acquisitions) activity and IPOs. We retain an underweight stance in the alternative management subsector, with a small holding in Blackstone providing selective exposure to the strongest franchise in the subsector.

US trip

A trip to the US in May to see 15 companies – including MasterCard, Marsh McLennan*, Interactive Brokers Group, Robinhood Markets*, KKR*, TradeWeb* and Moody’s – was helpful in reconfirming our conviction in a number of our holdings. It was also a useful opportunity to see management teams push back on the AI disruption narrative that impacted a small number of companies in the sector, which for now we have little or no exposure to. For the past six months, sentiment has been highly reactive to any company seen as vulnerable, but for now there is no hard evidence to back this up and often quite the opposite.

We currently have no insurance brokers in the portfolio, having sold our holding in AJ Gallagher last year on the back of its historically high valuation against the background of slowing organic growth, since when multiples for the sub-sector have fallen from the low 20s P/Es to mid-teens. Consequently, they remain on our watchlist. The share price fall has been exacerbated by concerns that AI will act as a further hit to their profitability. In our meeting, the management of Marsh McLennan countered that they saw limited risk because their proprietary data, the need for specialist advice due to the complex risks that need insuring and regulatory hurdles for AI alternatives provide a strong, competitive moat. Conversely, they saw simple standardised insurance such as home and motor most at risk of AI disruption. We would agree.

Outlook

Commentary from management teams in recent months has consistently been positive, with the caveat that the uncertain backdrop from the conflict in the Middle East could affect economic growth. However, despite positive earnings revisions, the sector has given back a significant amount of its recent outperformance as it is up less than 1.0% since the start of the year. Absolute valuations remain undemanding at 13.0x P/E multiples, while relative valuations remain very low relative to history with the sector trading at a discount of 33% to the wider equity market vs. an average of 21% looking at data back to 2005.

*not held in fund.

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Nick Brind
Nick joined Polar Capital following the acquisition of HIM Capital in September 2010, and is co-manager of Polar Capital Global Financial Trust and lead manager of the Polar Capital Financial Credit Fund. He has investment experience across a wide range of asset classes but since 2003 has focused on global financials.
Before joining HIM Capital, Nick worked at New Star Asset Management. While there, he managed the New Star Financial Opportunities Fund, a high-income financials fund investing in the equity and fixed-income securities of European financials companies. Previous to that, he worked at Exeter Asset Management and Capel-Cure Myers.
George Barrow
George joined Polar Capital in September 2010 as an analyst on the Financials Team. He is a co-manager on the Polar Capital Global Financials Trust, with Nick Brind and Tom Dorner.
He has over 10 years’ experience analysing Europe, Asia and emerging markets. Prior to joining Polar Capital, he was an analyst at HIM Capital from 2008 where he completed his IMC.
Tom Dorner
Tom joined Polar Capital as a Fund Manager in the Financials team in December 2023. He is a co-manager on the Polar Capital Global Financials Trust, with Nick Brind and George Barrow.
He joined from Aberdeen where he was a Senior Investment Director in the Developed Markets team and managed the Aberdeen Europe ex UK Income Equity Fund. He was responsible for analytical coverage of European financials and managed a number of other European investment funds during his nine years there. Prior to this, he was an analyst specialising in the European Insurance sector at Citi and Lehman Brothers in London.