Further to the announcement on 26 November 2019 (which we covered here) that Polar Capital Global Financials (PCFT) would explore a continuing vehicle as fixed-life end date approached, the trust has provided a further update on its future.
Following meetings with major shareholders, PCFT says a majority have expressed a desire to maintain an exposure to the company’s investment strategy beyond the end of the current seven-year fixed life in May 2020. Accordingly, the trust’s board has announced the following proposals (subject to shareholder and regulatory approvals):
- Investment Strategy: the overall investment strategy will remain unchanged and the company will continue to seek to achieve its objective by investing primarily in a global portfolio of listed or quoted securities issued by companies in the financials sector operating in the banking, insurance, property and other sub-sectors;
- Structure: the company will continue to operate as an investment trust with an independent board and third party investment manager. The company’s current seven-year fixed life structure will be adapted to instead offer a five-yearly tender offer to all shareholders and the Company’s Articles of Association will be amended so that the existing commitment to wind up the company by no later than 31 May 2020 will be deleted;
- Benchmark: the company’s current Benchmark is the MSCI World Financials + Real Estate Net Total Return Index (in Sterling with dividends reinvested). Given the company’s level of portfolio exposure to emerging market financials equities and its limited portfolio exposure to real estate equities, the benchmark will be changed to the MSCI ACWI Financials Net Total Return Index (in Sterling with dividends reinvested);
- Fees: the increased industry focus on cost reduction was a key theme in the shareholder meetings. In light of this feedback, the board has agreed with Polar Capital a reduction in the annual management fee, currently 0.85 per cent. of the lower of the company’s market capitalisation and its NAV, to an annual rate of 0.70 per cent. of the company’s NAV. In addition, going forward, the performance fee will be subject to an increased hurdle rate, with further details to be provided in the forthcoming circular;
- Dividend policy: the dividend policy will remain unchanged, with the company continuing to target a policy of dividend growth;
- Gearing: the company will continue to employ cautious levels of borrowing from time to time with the aim of enhancing returns, subject to an increased overall maximum of 20 per cent. (as opposed to the current 15 per cent.) of the NAV at the time at which the relevant borrowing is taken out;
- Liquidity Management: the board continues to believe in the investment manager’s strategy and remains optimistic about the outlook for the global financials sector. Consequently, ordinary shares bought back under the forthcoming tender offer (as described further below) and any shares subsequently bought back by the company will be placed into treasury and, in the event of the company’s shares trading at a sustained premium to NAV over a reasonable period of time, the board will proactively seek to re-issue these shares into the market;
- The company believes that the opportunity for shareholders to tender their shares every five years will act as a meaningful support to the share rating going forward. In addition, the board intends to adopt a proactive approach to providing liquidity in the company’s shares by using the share buyback authority on an ad hoc basis. As a result of these measures, the board would expect that, in normal market circumstances, the shares will trade at an average discount to NAV of no wider than approximately 5 per cent. over the longer term. Full details of the company’s future approach to liquidity management will be disclosed in the forthcoming circular;
- Tender Offer: in light of the proposed change to the company’s structure, a tender offer will be made to all shareholders who do not wish to continue their investment in the company, at the prevailing NAV per ordinary share less costs and other appropriate adjustments (such costs and adjustments expected to be no greater than 100 bps in aggregate); and
- Size: the above proposals will be conditional on the size of the company’s net assets immediately following the tender offer. Should the outcome result in a size which, in the board’s opinion, is too small to sustain, the board will put forward proposals for the liquidation of the company together with the option of an appropriate rollover vehicle for those shareholders wishing to maintain exposure to the asset class.
[QD comment: When PCFT launched, it set out a strategy that would capture the upside from a rehabilitation of the financial sector; banks in particular, after the events of the financial crisis. PCFT has done a good job for its shareholders since launch but banks are still very much out of favour with investors. It makes sense, therefore, to prolong the life of the trust for at least five more years. There is a good reason though why the trust might merit a life much longer even than an extra five years. UK banks form a big part of UK market indices but offer a narrow choice of stocks – it makes sense to look overseas and to invest in a more diverse portfolio. However, the global financials sector is a complex one and almost all investors will not have the expertise/resources to do their own stock selection. It makes sense to outsource this job to a dedicated and well-resourced team, such as the one managing PCFT. (The same is true of other sectors such as healthcare).]
PCFT: Polar Capital Global Financials set to continue beyond fixed-life