Polar Capital hunkers down

Shares for environmental, social, and corporate (ESG) and technology-focused fund manager Polar Capital (PLR) had suffered severe attrition prior to these results as the fund manager’s growth stock positions proved to be a negative. Instead, value-based strategies that encompassed decidedly un-environmentally friendly industries such as mining, oil & gas and defence found favour with investors looking for high yields at low prices. That trend was summed up by a net fund outflow of £1.3bn, down slightly from a grimmer £1.8bn in 2021, as investors headed for the tech shares exit in earnest in the year to 31 March. However, under the circumstances, Polar Capital’s performance was reasonable and, despite one-off costs chopping down profits, the dividend was raised by 15 per cent.

Many of its costs were related to one-off write-downs of acquired intangible assets and manager compensation awards that are linked to the firm’s revenues. There was some evidence of cost inflation, but the rise in staff costs of 12 per cent should even out once its acquisitions generate a full year of revenue. Still, it is interest rates, rather than inflation, that are the current touchstone for investors.

“We are at an inflection point in the interest rate cycle, which has happened very quickly after years of quantitative easing and investors are now actively pricing in interest rate risk for the technology sector,” said chief executive Gavin Rochusson. “However, we have seen some progress in our diversification strategy – emerging markets, Japan value and European companies are all attracting interest,” he said.

Another distraction for management will be the legal imbroglio following the closure of the Phaeacian Accent International Value and Global Value funds, which were shut down by the board of the funds in May 2022. Polar Capital has begun legal action against the counterparties. That aside, the financials broadly held up: net management fees were 31 per cent higher at £187mn, while performance fees, which are related directly to stock market performance, cratered by 68 per cent to £14.1mn.

Polar is a useful guide to investor sentiment because its focus on technology is often a proxy for broader volatility. As an investment opportunity, investors might do better to invest in the shares, rather than its funds, as these trade at a broadly flat PE ratio of 13 times Numis’s EPS forecast for 2023. With the dividend yield of 8.8 per cent thrown in, that looks a fair price. Buy.

Last IC View: Buy, 527p, 23 Nov 2021