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With Mary Poppins now back in the West End, how many theatregoers watching it realise that banks create money? So how do they do it? Well if you were to step onto the stage and into a branch of Dawes, Tomes, Mousely Grubbs Fidelity Fiduciary Bank and ask for a mortgage to purchase that dream property, Mr Dawes would not have to take out the bank’s ledger, marked ‘deposits’, to check whether they had sufficient funds which they could use to lend to you.
Instead, if you meet their underwriting criteria they would create the money electronically and put it into your account. While this is a gross simplification of the process - and their ability to lend depends on a bank’s capital strength and a multitude of other criteria (and certainly more than tuppence needed in deposit) - banks do literally create money. The question is in that case why have so many banks, especially in the UK, struggled to make shareholders much, if any, money over the past few years?
At its worst, shareholders of Metro Bank and Clyesdale Bank (since renamed Virgin Money after its acquisition) have lost shareholders 91% and 48% over the past year. However, investors risk looking at the banking sector, which is part of the broader financial sector, the largest in equity markets, through the lens of UK banks. While UK banks have floundered, in part because of PPI payments, there are banks globally that are either hitting all-time highs or are not far off doing so.
Banks such as JP Morgan in the US, DNB in Norway and HDFC Bank in India have returned 136%, 67% and 180% respectively over the past five years. The financial sector also encompasses insurance companies, consumer finance companies, stock exchanges, asset managers and so on, many of which have also seen substantial returns over the same period. Payments companies such as Visa and Mastercard, which are often included as part of the sector and benefiting from the shift of people using cash to using debit and credit cards, have seen their shares rise by over 200%.
How can one best take advantage of the opportunities? Other than directly, with the risk and returns that approach offers, there are a number of open-ended funds that invest in the sector, albeit less than there used to be as the sector remains unloved by many investors. The Polar Capital Global Financials Trust, a listed investment trust, is another way. Launched in 2013 to provide a lower risk way for investors to invest in the sector, it has a very diversified portfolio of predominantly large, well-capitalised banks and insurance companies.
Warren Buffet’s business partner, Charlie Munger is quoted as saying: “A great business at a fair price is superior to a fair business at a great price”. They have increased Berkshire Hathaway’s exposure to US financials over the past year by around $16bn at the expense of almost any other sector or industry. In an equity market where investors struggle to find value they see them as cheap. Dick van Dyke’s character in Mary Poppins, Bert, the chimney sweep sums it up nicely: “Still better than a finger in the eye, ain’t they?”
Nick Brind
Fund Manager, Polar Capital Global Financials Trust
15 November 2019
Note: All figures are to 31 October 2019
Important information
The information provided is not a financial promotion and does not constitute an offer or solicitation of an offer to make an investment into any fund or company managed by Polar Capital. It is not designed to contain information material to an investor’s decision to invest in Polar Capital Financials Trust plc, an Alternative Investment Fund under the Alternative Investment Fund Managers Directive 2011/61/EU (“AIFMD”) managed by Polar Capital LLP the appointed Alternative Investment Manager. Polar Capital is not rendering legal or accounting advice through this material; viewers should contact their legal and accounting professionals for such information. All opinions and estimates in this report constitute the best judgement of Polar Capital as of the date hereof, but are subject to change without notice, and do not necessarily represent the views of Polar Capital. It should not be assumed that recommendations made in future will be profitable or will equal performance of the securities in this document.
It should not be assumed that recommendations made in future will be profitable or will equal performance of the securities in this document. A list of all recommendations made within the immediately preceding 12 months is available upon request.
Polar Capital LLP is a limited liability partnership number OC314700. It is authorised and regulated by the UK Financial Conduct Authority (“FCA”) and is registered as an investment advisor with the US Securities & Exchange Commission (“SEC”). A list of members is open to inspection at the registered office, 16 Palace Street, London, SW1E 5JD.
