High-yielding Polar Capital in recovery mode

During the past eight years, the group has expanded its specialist investment teams from four – Japan, technology, Europe and healthcare – to 12, adding strategies including UK absolute return, emerging markets and global equity. In 2014, the top three strategies by asset size accounted for 69 per cent of the group total, which declined to 59 per cent during the year to March 2018, with the largest strategy, technology, accounting for 28 per cent. The two Japan funds accounted for just 8.9 per cent of assets compared with 43 per cent in 2014. Management has also enhanced its emerging markets team and launched an emerging markets stars fund, an Asia ex-Japan fund and a China-focused fund, although that could prove ill-timed given the recent downturn in emerging markets.

Polar’s client mix is also being diversified. The three largest sources of funds – banks, private wealth managers and Polar Capital Investment Trusts - represented 58 per cent of assets last year, down from 64 per cent in 2014. Management is trying to broaden this further by marketing more to institutional investors, which includes increasing its continental Europe distribution team and exploring sub-advised fund arrangement in the US.

The diversification strategy seems to be paying off, with Polar’s recovery firmly bedded in. Net inflows last year were £1.9bn compared with £230m of net outflows in the prior year – the corner was actually turned in the latter half of that year. Together with an £800m market return last year, funds under management grew to £12bn – up almost two-thirds on the same time five years earlier. That momentum has continued into the first quarter of the current financial year, with the group gaining £694m in net inflows and market returns of £927m, taking assets under management to £13.6bn and prompting further analyst upgrades. In fact, during the past six months, consensus analyst earnings forecasts for this year have risen by almost a fifth.

The improvement in last year’s earnings also meant dividend cover increased, taking the group out of a two-year period in which the payment was uncovered. Management intends to pay a dividend within a range of 55 per cent and 85 per cent of adjusted total earnings, depending on the scale of performance fees in the relevant year. Based on Numis earnings forecasts, that would result in a dividend yield of 6.5 per cent in 2020, covered 1.3 times by adjusted earnings.