Polar Capital struggles to diversify

Few fund managers have ridden the wave of technology shares over the past 18 months as effectively as Polar Capital (POLR). The manager’s technology funds have been the industry’s star performers as a high concentration in individual sectors paid off in spades. While profit-taking and redemptions have had an impact on tech funds, the company’s ESG-focused funds provide another potential pull for retail investors looking for an ethical home.

The weighting towards technology increased by number, but not percentage, in these results. Compared with the end of year, tech funds made up 46 per cent of Polar’s total assets under management (AUM) – a drop of three percentage points – but saw an increase in cash terms of £500m to £10.7bn. The change in fund mix was largely due to a corresponding rise in Polar’s healthcare fund assets, the other area where the manager has a heavy presence, followed by insurance and UK value. The obvious problem for Polar is that the high market Alpha it achieved with its funds could reverse quickly with the onset of another rotation to value, so diversifying the business effectively remains a long-term priority to remain competitive. As things stand, the fees keep rolling in for Polar Capital; the increase in AUM meant that management fees, excluding commission and rebates, rose by 50 per cent to £92.9m.

Much of the talk around Polar Capital recently has been over whether the fund would be able to attract US retail investors into its open-ended funds linked to cheaper UK assets. So far, there seems little evidence that the US retail investor market – still the biggest in the world – is showing much interest. Apart from a slight uptick in cash terms, the proportion of AUM in the UK Value fund stayed static at 7 per cent. Meanwhile, in the ESG arena, it will be some time before Polar’s sustainable thematic fund starts to deliver on their potential, as the fund has only just been seeded with £7m of capital.

Polar’s shares currently trade at a forward price/earnings ratio of 13 for 2022, falling to 11 for 2023, respectively. That does not suggest overpriced, certainly compared with its peers, and holding Polar shares remains a cost-effective way of gaining market alpha without forking out for the expensive assets themselves. Therefore, we maintain our long-standing buy recommendation on the basis that the manager’s move into ESG investing will eventually move the dial on its diversification strategy. Buy.

Last IC View: Buy, 856p, 02 Jul 2021