The London South East, Investing Matters Podcast Episode 6 George Barrow Polar Capital

LSE 00:01

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Peter Higgins 00:17

Hello, and welcome to the London South East Investing Matters podcast. My name is Peter Higgins. And today I'm here with George Barrow, the co-fund manager of Polar Capital Financial Trust (PCFT).

Peter Higgins 00:31

George, how are we doing?

George Barrow 00:32

Very good, thanks, Peter, thanks for having me on.

Peter Higgins 00:35

I wanted to talk to you George, with regards to the Polar Capital Global Financial Trust, which you're a co-manager. Yeah. But I wanted to start initially with your educational aspects and graduating from SOAS in London, and just talk to me a bit about that, really, because it was more about global studies that you were doing at that stage. Correct?

George Barrow 00:56

That's right, I read international studies at SOAS in London, with my Master's. And I was very interested in international relations. And that led on to A think tank called ICG. And so that provides analysis on conflicts around the world and is used by governments to inform policy decisions. And you know, at the time, I felt, you know, that was sort of where my career might be heading, I'd used research for my Master's dissertation.

And I liked the fact that it was analytical, but also involved, you know, my interest in Kaizen, and it was, it was a very interesting place to start, you know, I got a chance to, you know, sit in on parliamentary committees, I think the issue on tough war was very prominent at the time.

So that was exciting to see how policies formed and interacted with think tanks. But ultimately, I kind of realised that, you know, that wasn't me it as a longer-term career at the time, you know, had a growing interest in in financial markets. So wanted to combine that with an analytical role. And that led on to the start of asset management.

Peter Higgins 01:59

Indeed, so you're in your mid-20s, and you join as a junior analyst, at HIM Capital covering the financial sector. So tell us about that, and going in, at that very young stage as a junior analyst, and what that meant, and what your role was as a junior analyst?

George Barrow 02:15

Yeah, I mean, it was just starting out. So really just learning from people around me, you know, learning the basics of fundamental analysis and learning about the sector. So, you know, financial sector funds, in my focus at that time was I was on Europe, so covering the region and supporting it, the fund managers in terms of their their stock selection and coverage. And, you know, I started right at the time of the global financial crisis.

So it's quite a time to join and focus on the sector. It felt like, each weekend, there will be new rumours about a bank run or some kind of systemic issue. And maybe it was a blessing that was beginning of my career and appreciate probably quite our significant event was, but you know, I certainly benefited from having people around me who'd been through other cycles and seeing downturns, although maybe not as larger shock as the GFC.

But the early stages of your career, you really benefit from having that experience around me. And I kind of in the subsequent 12/13 years, you can see how profound an impact that downturn has had on the sector and and continues to happen. And, you know, post that we saw 10 years plus of regulatory tightening, we saw capital build. And, you know, looking back, I think, as an analyst that continues it having been through that experience, I think you always retain a focus on balance sheet strength and on risk management, having seen some of the effects of going through such a downturn.

I think on the other side, essentially to see the extent to which that continues to inform people's perception of the sector going forward even today. So despite the fact that the sector might have much stronger capital and stronger funding, I think we still see perceptions which might be out of date. And as an investor, I suppose that that opens up opportunities for us.

Peter Higgins 04:03

Absolutely. And I agree with you wholeheartedly regarding the changes that have been made since the GFC. I wanted to go back because you touched on a really, really important point here. As when you started, it was the beginning of your career. And you had so many other people around you as well, that gave you and enabled you to gain so much more experience.

Could you share with me some of the learning points during that phase of going in? And have obviously experienced in the GFC for the first time as a newbie even?

George Barrow 04:31

Yeah, I mean, it's I think you gauge the level of concern by the reaction of those around those I've seen it and been through other downturns. And I think being in a team, which has a real depth of experiences is absolutely invaluable.

And, you know, I've been lucky to work with very talented investors and experienced investors and I've worked closely with Johnny Yakas, who's the co-manager on the trust and on financial opportunities.

He has a deep knowledge of the sector and has always been willing to share that he came from the sell side where he had a research operation for Asia. And he's always had a methodical approach to it. And I think he's been able to facilitate building out a lot of research in house.

So we have a database, which we've tracked over 300 companies, and I think what's been good to learn from him is that to trust your own analysis, and to trust the research that you do, you're not reliant on external providers external is sort of sell side ideas. And that gives you the confidence to be contrarian. And I think that's been a, you know, big lesson that I've learned from from working with John and others like Nick Brind, other co-manager on the trust and like Alec Foster, who managed insurance funds, they have a lot of experience. And they certainly seen a number of downturns.

And when you invest in a cyclical sector, like financials, you certainly take reassurance from those who have seen it before. And I guess, like gives you the confidence to see it maybe as a buying opportunity.

You know, when you're going through what we've been through recently, with the pandemic, and with the sell-off that's been there, I think you need to have experience to be able to sort of gauge and judge what is a buying opportunity or not.

Peter Higgins 06:11

Indeed, so you've been now at Polar for 10 nearly 11 years? So you've been promoted last year, to the Co-manager of PCFT from senior financial analyst. So you've learned a lot, you've gained a lot of experience, and you've actually nurtured the portfolio and assets under management with the rest of the team.

George Barrow 06:29

That's right. I mean, it's been a gradual process of taking on more coverage, more responsibility. I mean, I think the team is collaborative in the way that it works. So we do look across geographies and sectors together, and we make decisions in collaboration.

But I think from starting out covering one region, gradually, I've grown out of Asia and emerging markets and the US and sector as well transition significantly since I started so you know, the whole notion of fintech wasn't really around when I started investing, and seeing, seeing that all the opportunities and range of Fintech was very limited. Now, that's certainly sort of breaking through, and we're seeing much more opportunity.

So you know, it's been a real journey in terms of broadening what I cover, certainly in terms of changing the way that you analyse companies as well, he can't apply the same approach to, you know, analysing a traditional bank as he would maybe a fintech company. So we've had to, you know, create a whole new approach to valuing companies valuing growth stocks. And I think so that's what's been interesting about the role is that you're always learning, it's constantly changing. So you can't sit still. And you know, it's been oppressive been pretty wild ride, looking at the sector over the last 12 years or so. But it's certainly never been boring.

Peter Higgins 07:44

Absolutely. So with that in mind, I wanted to talk to you a little bit about the process and how you and the team go about selecting a stock or holding, what does it start off fundamentals, macro, etc?

George Barrow 07:57

Yeah, I mean, I think as mentioned, we have a database there, that gives a quantitative framework, how we look at things. So we do have, say, 350 companies, which are on that. And so we update that information.

That's helpful as a starting point, because it can, you know, throw up ideas, it looks across various measures, whether it's valuation risk growth, management, and and that can be a good starting point, you know, it could throw up ideas or make you question, why do you hold one stock over the other, you can compare across different regions. So that could throw up an idea, as a starting point that you then go to do fundamental research in terms of looking through the financial statements, you look to meet management might sort of build a more in-depth model. And you would then, you know, look to bring the ideas to the team members, you would discuss it, they're likely to challenge it, get you to defend the research that you've put together.

But it's unusual for it just to be one person to generate the idea and push it through. It's, it's more of a conversation in a collaboration, and you'll put your thumb around that. But I mean, you leverage off different parts of the teams will have stronger knowledge in different areas. So you might lean on them for those, but it's much more part of a conversation rather than one person driving through that.

Peter Higgins 09:10

Excellent. So let's turn it on its head now. Is this a similar sort of process for when you or someone in the team is looking to opt out and exit a stock or a holding you think you know what this has gone? It's now fully valued, or this has happened. So therefore, we need to be moving out of this and looking for something that's lower valued, but as equal quality? Maybe?

George Barrow 09:31

Yeah, we look to be disciplined in terms of when we would sell and, you know, we obviously have our various valuation screens that when it might hit a target price, so yeah, we will look to manage a portfolio on that basis.

We have, you know, some of the mistakes that we've made being too early in in selling stocks that have gone on to do well, and there's always a temptation to top slice and to take some profits on your winners. So I think it's about you know, retaining conviction, those that are doing well, but I think we've seen a big sort of divergence in the disrupting stocks are continuing to do well and continue to re-rate, and they go well past your target prices.

So an example of that would be a payments company called Adyen. You know, which is particularly well placed. It's related significantly during the pandemic, but it seemed very strong operating trends. It's called a tailwind from winning the sword e-Bay mandate.

It's increasing its presence with us merchants as best in class as a famous provider. But it has re-rated significantly during the pandemic. So on a sort of valuation call, we sold the position in May, but you know, it's then gone on and risen another 40%. So I think it's looking in combination, both your target prices, but also the way in which the investment case might have shifted, and how to solve underlying outlook change for the stocks.

Peter Higgins 10:49

Indeed, we see a massive sea change a search regarding Fintech and financials and I was going to ask you this question, really regarding the banking sector and insure tech, as to which sector of the two are utilising fintech the best and where you seen the most value being created regarding margins, and also the customer interaction?

George Barrow 11:09

I mean, I think it broadened out. So you know, initially, we were investing primarily within the payment companies. And we hold names like PayPal, and MasterCard, they are very well positioned for that structural shift from cash to digital payments, we've only seen that strengthened during the pandemic and people's attitudes towards use of cash, I think is a permanent behavioural change, you know, I don't think they're really going to go back to using cash in the same way that we did before.

So I think, you know, there's, there's a clear structural trend in terms of payments, and we've looked at to play that, I think we've been a bit more sceptical about the balance sheet type fintech models.

So I think with the peer to peer companies, we typically didn't invest in those, we were a bit concerned about to negative customer selection, the types of customers they were bringing on, it hadn't really been through a credit cycle.

So we wanted to see how underwriting was holding up through a downturn. But I think now we are seeing a broader range of balance sheet type, Fintech models come through. And thinking in emerging markets, I think that's a really interesting sort of new area for the digital bank, because that being able to reach the unbanked in a way that wasn't possible before.

So, you know, it's that combination of broader access to smartphones, you know, some government initiative to drive financial inclusion, and a new Fintech that's really making a difference. And we've had a company in Brazil, a digital bank, or new bank list this week, I think it looks very interesting. They've expanded, I think, up to around 48 million customers and most of that is driven by word of mouth.

So I think 80 to 90% is word of mouth, they've got a very high retention rate, but crucially, they've got a low customer acquisition cost, it's about $5 per customer. When you combine that with a very large addressable market, I think that's really interesting as a sustainable growth case for a digital bank in an emerging market. And I think we're going to see more of these come through. So I think this area could be interesting, for the trust.

Peter Higgins 13:10

Excellent. I wanted to go back, if I may, you mentioned MasterCard, and there was something in the news of late regarding VISA. And I wanted to hear your thoughts really on Amazon's recent move, as it stated intends to block customers for making VISA credit card payments, in a stance against absorbing VISA fees. Do you think they'll be a spillover regarding MasterCard? Or do you see this being something that's addressed before? It's implemented by Amazon during 2022?

George Barrow 13:37

Yeah, we have seen the payment company's been pretty weak recently, and as you mentioned, these concerns about pricing about new entrants, its concerns about regulation as well, in relation to the the Amazon news.

You know, I think, periodically, we do see this, it can be a negotiating tactic, though, typically, they will probably come to some sort of form of agreements. And there are many retailers or any really with the scale and breadth of Amazon to be able to sort of push VISA and MasterCard in terms of the pricing cuts.

So this is a minor negative, but I don't think it undermines the longer-term investment case of benefiting from that shift towards digital payments. They've been pretty smart in terms of their acquisitions, benefiting from, you know, account to account transfers through acquisitions like broker link and nets. And you know, there's a long way to go in terms of that transition to digital payments.

So I think they are going through a bit of a weaker patch at the moment, but I think we've seen it as as an opportunity. So we've actually been adding to some of the payments names at the moment.

Peter Higgins 14:39

Oh, that's good to hear. So with regards to digitising, which listed entities in your portfolio doing this best which one are you seeing actually investing in R&D, investing in innovation and actually being rewarded accordingly?

George Barrow 14:53

Yeah, I mean, we're seeing happen in different phases of speed. But I think, you know, we look to play things like the online shift to wealth management through names like FinecoBank in Italy, which is an interesting platform for investing but also for banking as well. And they've been smart in the way that they've been able to attract affluent customers in terms of their service that they offer. And they're looking to take that internationally. So I think they're very well positioned to sort of benefit from that shift to online investing. And they're able to passport their services to other European markets quite cheaply as well.

So I think that that's an interesting sort of case in terms of shift towards online investing, in terms of the sort of incumbent players, you know, that shift in distribution is happening at different paces. But the Scandinavians are quite a good example of a region in which they change the distribution quite quickly.

So think about the Norwegian banks, they've put their branch networks by 80%, over the last 10 years, you know, they're now operating with far fewer branches, but they've maintained low market share, because they've improved their online services. So we're looking for those kind of names that have a compelling online offering, you know, have an efficient cost structure. These are the types of incumbents that are going to be so long-term winners. We're also looking for the the opportunities on the new edge site as well, versus looking on both sides. You know, both of the new entrants and the incumbents.

Peter Higgins 16:20

Indeed, so the incumbents are doing well. And they're innovating and adding more digitalization to the platforms. And obviously, since the GFC, the banks have faced several stress tests, even up until last year with COVID. George. So with regards to that, and with that in mind, are you seeing and feeling that the banking sector is stronger now and more resilient? Or is there still things out there that you think in? Actually, they've not resolved that matter out there yet?

George Barrow 16:47

But it's been a significant stress test for the sector. And I think it's been an important one to demonstrate that they are much more resilient. So I think we would bang on to investors about how the sector has changed and how it's strengthened its capital, and its lending controls.

But I think people wanted to see it go through a downturn before they actually given the credit limits changing. So you know, we've now we've now had that stress test with COVID. You know, albeit that has been supported through through government stimulus.

But the sector's held up very well, NPL’s have remained at low levels, they've certainly been part of the government's solution for recovery. So no issuing known loans like CBILS in the UK, or PPP in the US.

So it hasn't been a source of instability as it was last cycle actually has been part of the recovery. We've seen banks returning to paying a yield very quick paying a dividend quickly, I think that's very important as well. So you know, we think about the GFC, we didn't even know what the levels were because the regulatory minimum kept changing, we had a long period of regulatory tightening.

We now know what the minimum capital levels are, we don't know what the sort of regulatory framework is. And that gives management's the confidence to return surplus capital, that we're seeing that now.

So as soon as the capital return restrictions were lifted, it seems very large dividends being paid for a number of European banks are yielding in excess of 10%, because of the cash dividends from last year, the US banks, if you include the buybacks and the dividends, ideally, just in excess of 5%.

So that is a world away from what we saw last cycle, when we were thinking about all we're seeing diluted capital raises coming through and concerns about systemic risk. So the sector has has changed significantly. And I think it needed to go through downtown to to demonstrate that.

Peter Higgins 18:35

Indeed, and I think some banks have come back much stronger than before, I want to talk about some of the banks, which you currently hold, if I may just ask you, regarding your U.S. and Nordic exposure, and UK exposure, which you've got a small amount of, if you just want to share with us, the companies that you're holding strongest in those areas, please?

George Barrow 18:54

Yeah, in the US, we own a number of large campaigns, which we think continue to offer strong value, and they are rate sensitive, I know they're going to benefit from pickup in terms of an ongoing thing going forward. And one of the key areas of overweight for the fund is actually to the US more mid-cap space as well. And names like Silicon Valley Bank will be a good example within that space.

So these are banks which are focused on a particular region within the US or they're focused on a particular sector. And so Silicon Valley Bank, as the name suggests, based in California, lends to the technology sector is seeing very strong growth.

So underlying loan growth of around 40% year on year last quarter, is maintain that with good asset quality, growing as book value by 40%. year on year.

So I think these kind of names are particularly interesting for us. It's a very sort of broad pool of names to look at there still over 3,000 banks, I think in the US to analyse so you know, there's a lot of opportunity there.

They're also highly rate sensitive. So on average for our US Bank holdings, 100 basis points rate rise will increase earnings by around 17% in year one,that increases in year two, as more of the loan book gets repriced.

So I think we know we are seeing a lot of catalysts going forward. They're not just from economic reopening, but also from higher rates coming through and then continue to return surplus capital. So I think it is, you know, it does remain at an interesting point of time for the sector. And that's reflected in how the trust is positioned.

Peter Higgins 20:27

Excellent. So with regards to the banks you have in the Nordic Region, and on the UK Stock Exchange, what's your exposure there, George?

George Barrow 20:34

Yeah, I mean, in the Nordics, we just hold Nordea, I think is very well positioned in terms of capital return, holds a lot of surplus capital, which is committed to returning.

You know, we think that that leads to a high level of capital return, not just for this year, but next year, it has a level of race sensitivity as well, particularly given earlier rate rises is coming through in Norway.

So it has exposure to across the Nordic Region. And it's done well in terms of upgrading its IT systems as well as improving its cost efficiency. So you combine that with an undemanding valuation, and it looks interesting, in a European context. And then we think about the UK. I mean, traditionally, in the UK, we'd be more positioned within the Challenger banks. And so we we've held OSB since IPO. And you know, it's been one of the stronger names that we've held, I think it IPOs, at about one pound 70 is now over five pounds, he has been in a pretty volatile, UK political economic environment, since then, we've had to deal with Brexit and have to deal with COVID.

Now, but I think what we like about it is it's got a niche positioning within a specialist mortgage area, it can generate, you know, attractive margins of profitability because of that niche focus and management have been consistent in terms of delivering on their targets. And so, you know, it's been a strong investment for the funds, and we think it is well placed to grow from this level, you know, it's also trading at a very reasonable valuation, round book value, relative to the high teens ROE, so that air has always been a sort of strong focus for the trust. But more recently, we brought it up some of the large cap banks in the UK.

So adding to positions like HSBC (HSBA), we like the fact that it is one of the most rate sensitive names has become more sensitive. So it's taken in a flood of deposits during the sort of COVID period, loads deposits gone down to sort of low 60s levels, they've guided for 100 basis point rate rise to an additional 5 billion their revenues in year one.

So that's a major uplift to their PBT, it's around sort of 30% uplift their profits, as writers come through. So that really is more of a sort of rate rise play, it's play on some sort of improving or reduce concerns around China and increased activity in Asia. And you combine that with a very sort of attractive valuation. So at the moment, we are sort of small for choice in within the banking space at the moment, there's a lot of opportunity, given where we are in the economic cycle.

Peter Higgins 23:08

Indeed, and I think you've made quite a shrewd move in the sense of almost getting your Asia exposure via HSBC, because you don't currently have any exposure to Chinese banks, at the moment, what would need to happen for PCFT to look into those banks more so in China to get more exposure? What would need to happen over there?

George Barrow 23:27

Generally, we don't invest in state banks. Across the funds. I think we struggle in China that often you get state banks, which are making decisions, which are not based on purely commercial reasons they might be lending to a state enterprise, which they're directed to do.

So the level of disclosure is, is not good. So it doesn't really fit our process in terms of analysis and getting comfortable in terms of the kind of risks they're putting on the balance sheet strategy that they have.

So I think if we don't have any exposure to some Chinese banks, and I think we could if there was a route to get more exposure to the economy through more private sector companies, we actually have a company called Chailease, which is a Taiwanese company, but has operations in China.

So that is a way of getting exposure to China sort of SME lending, but through a private sector company. And so we're looking for those kinds of opportunities rather than going via the State Bank.

Peter Higgins 24:23

Excellent, excellent idea. Now, you've already touched on banks being one of the biggest beneficiaries of the rise in interest rates, but I wanted to touch on the fact that obviously, a lot of the conversation this year has been about interest rates, but also about inflation being transitory and that narrative seems to be changing somewhat. And inflation seems to be getting a bit stickier. So what are your thoughts on inflation versus interest rates? And how will banks come out of this in the next three to six months to a year?

George Barrow 24:51

Yeah, that's the million-dollar question. We've been in such a long period of declining rates and low rates and where inflation hasn't had to be, you know, thought about much. And I think until sort of September time, it was pretty consensus that it was transitory. And as a supply chain bottlenecks get resolved, you're going to start to see inflation come down again.

But we've seen some more signs of more durable inflation come through. And you know, whether you look at areas like housing costs or wage inflation, I think last quarter, U.S. wage inflation was at its highest point since 2004.

So I think, you know, we're certainly seeing signs of more duable inflation coming through, we have seen a bit of a shift in tone from central banks to acknowledge that. And I think on a more longer-term basis, you think about the potential impacts from COVID. And what that means for supply chains being reworked.

Maybe focus on more sort of regional supply chains, rather than globalisation and as inflationary, you think about the whole process of moving to a more sustainable economy from from a climate change perspective.

So shifting that green transition, that is likely to be inflationary as well. So I think we see certainly sort of more short term and longer term signs of inflation coming through. And I think we're seeing the market and central banks react to that.

So we've seen a bit of a change in tone in terms of expectations on timing of tapering, coming through, essentially that that could finish towards second quarter next year. And we would expect bond yields to right alongside that.

So I think what's important to notice that there isn't really huge expectations for rate rises going forward, certainly not in terms of analysts forecasts for the sector's earnings. So it really doesn't take much to be a sort of positive uplift when people just start going through even one set of great prices going through into models. So that would have a significant impact on the sector, as you've seen it in previous trade price cycles.

Peter Higgins 26:52

Indeed, and you touched on a very important point in the middle of that George I really appreciate. You mentioned ESG, and the impact and implications on margins and profitability, and also the costs, etc. Can you just expand on that just a little bit, because a lot of money is going into ESG and supposedly, a lot of retail investors are asking questions about the ESG side of their investing. So could you share a little bit more on that for me, please?

George Barrow 27:17

Yeah, I mean, it's becoming more prominent in every meeting that we do on a both the micro level for companies but also macro as economy's trying transition, and governments put more resources to shift into more renewable sources of energy that is going to be inflation as they shift to other sources.

The text that I look at the data at the moment is quite patchy in terms of what they provide on terms of ESG disclosure, but we're seeing the regulator, look to standardise that so we would expect to get much more granular information.

For example, where does the bank lend? What kind of companies are exposed to fossil fuel lending? And so we expect to see that sort of level of information improve, we look to do our own analysis in terms of ESG.

We've tried to pull in data in terms of both environmental, social and governance aspects. I mean, we've always focused in terms of governance in terms of our process, but now we're getting more information in terms of cultural factors and environmental. And in meetings that we have in management in our we're much more able to push them in terms of improving their ESG disclosure,

I think what we're seeing is a real, we're seeing small cap companies get penalised because they don't have the same level of resources to dedicate to this. I think that's skewing a lot of the third-party providers.

So the MSCI might give a zero score to a small cap bank in California, because it doesn't provide ESG reports. And it's giving a reasonable score to a Chinese state bank, but then into a coal power plant. So just because then they produce a disclosure. So I think, you know, it's incumbent on us as investors to encourage these smaller companies to provide disclosure, otherwise, they're going to get penalised, and that's going to affect their stock price.

Peter Higgins 29:01

Brilliant, I love that reply. Thank you very much for that George.

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Peter Higgins 29:22

I wanted to move on a little bit, George and come back to some of the aspects of PCFT. I wanted to talk more now about you George and his sense of obviously, you're very, very busy with the work that you do. You're analysing all these companies, you're working as part of a team. But I wanted to just find out a little bit more about using individual and talk about your outside interests. And I hear that you do some volunteering at the NSPCC, Childline, tell me about that? And what drew you to that particular interest and then talk a little bit more about delivery stuff that you do as well?

George Barrow 29:52

Yeah, I think I've always enjoyed do something completely different. In my spare time. I don't think about the sector. Don't think about asset management. You know, I've been lucky to volunteer at some really great organisations and whether it's Childline, where you know, I work as a sort of switchboard volunteer. And I think it's obviously really important that children have a resource that they can go to, they can have people to listen to if they need.

Unfortunately, during this period of COVID, we've only seen more children go through periods of mental health crisis and not have the same resources to speak to someone. So I think that I found very valuable in just spending time with Childline. And my experience, they're just raised my respect for what they do. And the people that work there, I've done a bit of work where I've just started the training and completed that for a charity called Bookmark, which was helps children develop their reading skills. And you know, having two young kids myself kind of highlights the importance of spending time with kids and getting them the best out of them.

So unfortunately, some children might not have the same level of resources. So if you can spend a bit of time to help them, I think it's time well spent. And then I also do spend some time with a guild in a city called the Leathersellers. And they bought a number of charities, often based in London, working in more deprived areas of London.

But I also spend some time with the investment subcommittee there. And I think that's been really interesting, because you work with people from different parts of the financial sector. I mean, typically there, they've got a lot more experience than I do. I think what's what's interesting is that we can invest with a much different time together, and typically haven't yet imagine industry.

So we're thinking 20 or 30 years down the line, how should we be positioned, and we work on the basis that best long-term returns of equities are rating, the fixed income.

So we remain fully invested in equities, we use active managers to try to get sort of global diversified exposure, and we have the luxury to be able to sort of ride out periods of volatility. And I think that's been interesting to see that difference you can have when you have a 20 or 30 year time horizon, but it's a much shorter sort of time pressures of working within within the industry.

Peter Higgins 32:08

Thank you for that George, and I appreciate the work that you're doing in the community, because as you've experienced yourself now, with the work that you're doing, there's lots of disadvantaged communities in and around London and around the whole of the UK.

So it's fantastic that you're, you know, even with two small ones as well finding the time to do that. So bravo to you George, I want to ask a little bit with regards to some of the work that's been done. Obviously, you're part of a larger team at Polar Capital. And you did your studies, what work is being done within Polar Capital regarding graduates, and how are you facilitating and supporting that?

George Barrow 32:43

I think a part of they do a good job of supporting graduates, and they have an internship programme every year, which would take people in which either currently studying or have recently graduated, and they get an opportunity to work directly with analysts or fund managers, and they get to spend time researching a particular stock, and they would then get to pitch that to the management team. And you know, that will give them time directly spent with an investment team.

So they actually get a sense of what it is like to be analysing a stock and what sort of competitions happened in the team. So, you know, at the end of that period, you can think it's definitely not for me, but you know, it gives you an opportunity to get a sense of what of what the day to day is like, and obviously Polar takes on people directly into the operate into investment teams or operations from graduates as well. So I think there's a pretty good route at Polar people with lower levels of experience.

Peter Higgins 33:38

Excellent. So with regards to your journey from HIM Capital to now, which stock has given you the greatest pleasure in a sense of you've researched that you've analysed that you've invested in it, and you've reaped the rewards in a sense of the best sort of investment lesson that you've you've attained from the research you've done?

George Barrow 33:56

Yeah, I mean, I think in the journey, some of the small-cap the niche banks, I mentioned that it's been very rewarding, because they'd be very volatile, they've had to come through a period in which there was some scepticism as so UK small cap bank.

So you know, go back to OSBS as a good example of that has been a fantastic investment for us. And but it's certainly been a very has been through periods of heightened volatility, but it's investment where you learn a lot from it, you learn to stick to your guns and have conviction in what it is to underwrite properly, to be consistent in terms of your delivery. And so seeing that from IPO, where it is now going through acquisitions that people try to call and to continue to sort of generate attractive levels of profitability.

I think that has been a satisfying investment and one that you sort of learn a lot from and gives you conviction towards other sort of small cap stocks that the might take a beating during downtime, but if you have conviction in the business, you know, it gives you confidence to hold them through that periods of weakness.

Peter Higgins 35:00

Thank you, George. So with regards to that, then the ones that got away in a sense of you did all the analysis the team’s done the analysis, but it's turned out that it didn't work out as a mistake lessons learned. What's been your greatest lesson?

George Barrow 35:13

Yeah, I mean, we've definitely had our fair share of those, I'd say we work in a highly regulated sector. So we always have to be careful about the extent to which regulatory codes can shift. And where, you know, on the fintech side, you have to be careful about the fact that some fintechs look to play the regulatory arbitrage between being a technology company, but lending into the financial space. And so we've certainly seen some examples, particularly in China, where the regulatory goalposts shift. And they can sort of undermine that business case for either peer to peer companies or companies like Alibaba without financials.

So that's certainly been, you know, lesson learned closer to home in the UK. And we're better at the company called Amigo, which offered consumer finance through guarantor loans. So through that use of the guarantor, it gave customers with a poor credit history access to lending, it was regulated by the FCA.

But I think looking back at it, there probably wasn't some red flags, we could have paid closer attention to, maybe the sort of founders’ relationship with a regulator was a bit tense. And we saw the regulatory goalpost shift, and you know, the business case get undermined.

And unfortunately, you know, we took a small loss on it, and then we got out of it before it corrected materially but you know, certainly was a less than about, think if you're, if you're lending in a sort of high APR space, the margin of error is tiny of how the regulator perceives you. But you have to be absolutely sure about the type of business, the way it's conducting itself with his customers. And I think that's made us more sort of cautious about those types of businesses.

Peter Higgins 36:49

Indeed, I mean, I've been looking at the charts for PCFT. And it's an absolutely stellar move since the march lows of 2020, what's been the most satisfying aspect of that job, because obviously, you guys continue to push on. And a lot of companies absolutely didn't know what to do last March, April, May. But you guys actually persevered and have come through in really good fashion.

George Barrow 37:11

It's been a roller coaster for two years or so. And I think, you know, important to emphasise that it's definitely been a team effort. And, you know, we've benefited from others in that sense in terms of leveraging off their their decisions and ideas. And I think, you know, we've benefited from shifting the portfolio quite significantly during that time.

So we took down our banking exposure in the early stages of COVID, sort of second quarter, and in 2020. And it became clear that the economies were heading for a major downturn, and we raised our payments exposure as a defensive measure, we weren't expecting them to kick on as much as they did and rewrite as much as they did.

But you know, they certainly weren't a big source of alpha for the funds. And I think, you know, as we went through the downturn, we were getting more data suggests that actually, the asset quality was holding up much better than initially feared. And when we looked at things like deferral loans, and other leading indicators of asset quality, it suggested that actually the market was much too bearish on the outlook.

So from around sort of August, September, time last year, we started to actually go back into the banking sector, and add to those names, we took up the gearing on the trust as well. So when we have the vaccine efficacy data come in about November last year, we're positioned for that. And we sort of built into that as well by raising gearing levels and going more into the banking sector. So it was trying to sort of shift allocations of the funds during what was quite a volatile time, and that certainly helped the performance of the trust.

Peter Higgins 38:46

Absolutely. I always like to look at total returns annualised when I'm comparing stocks and funds, etc, George and total annualised for the last 12 months 29.83, 3 year annualised 15.1, and five year 10.5% That is consistency, my friend, very, very well done there.

George Barrow 39:09

Yeah, we've been yeah, pleased with the performance. And it has certainly been a, as I said, very volatile time. But I think, you know, it's been pleasing in the fact that we've been saying for some time that the sector has become much more resilient, whether it now different ways. So having that proof point now, I think it's satisfying to be able to go to investors and say actually, it has been resilient you know, its return retained to pay dividend yields, and it has transitioned. I think that is, it's been satisfying.

Peter Higgins 39:37

I've asked most of my questions, but one aspect I haven't covered thus far regarding speaking with you about financials, George is insurance and insure tech, I just wanted to briefly just cover that. And for you to just share with me the exposure that the trust has to the insurance sector and insure tech and where you see the greatest opportunities?

George Barrow 39:55

Yeah, we're primarily position within the non-life side for insurance. It's around four 10% of the trust, we invest in some of the Lloyds' (LLOY) vehicles or can be some of the Diversified names in the US like Chubb. We also have positioned within life insurance in Asia for AIA, just based on the sort of demographic trends that we're seeing in that space, but mostly positioned within the nonlife space, we are seeing a rate hardening backdrop for them.

So they have the capital to grow into that. I think we've been a bit disappointed in terms of the stock performance. So despite that rate hardening, you know, they really haven't recovered to the extent that we thought they would. And I think there's been some concerns about losses. And they've been elevating catastrophe losses, but also losses related to COVID. I think there's been a bit of a reassessment as to the potential sort of frequency and severity of losses going forward because of climate change as well. I think that could be a bit of an overhang on on the space, but we do see opportunity there is useful as a portfolio construction, typically or historically has been more defensive.

But we are underweight because you know, I've mentioned if you want to get exposure and gearing into economic recovery and reflation, it's the banking sector that gives you that gearing, on the insure tech side is not an area that I've looked at in detail, a colleague looks into more detail, but I think it's not a space that we know well and looked at stocks like Lemonade before, where we don't think that there's some unit economics that aren’t attractive.

So having invested in it. I think, as with the other Fintech space, we are going to get a broadening of opportunity. So we like to spend more time on.

Peter Higgins 41:33

Brilliant, George, I've covered all my questions, and it's been absolutely phenomenal to have you on the Investing Matters podcast. Is there anything else you want to share before we close this?

George Barrow 41:43

I think that's been an interesting conversation. I think we've covered a lot in terms of the sector background. So I appreciate the opportunity. Thank you very much.

Peter Higgins 41:54

Thank you ever so much. That was George Barrow, co-fund manager of Polar Capital Financial Trust. Thank you ever so much, George for being on the Investing Matters podcast. Take care. God bless.

George Barrow 42:05

Thanks Peter.

LSE 42:06

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