5 funds that will benefit from higher interest rates

The recent increase in interest rates by the Bank of England has shone a spotlight on the actions of the major banks. The uplift of 0.25% was automatically passed on to the millions of borrowers with tracker rate mortgages, but the majority of savers with variable rate accounts are yet to see any improvement.

Banks and other financial companies are one of the few sectors of the economy to benefit from higher interest rates as they are able to increase the margin between the rates they charge on mortgages/personal loans and what they have to pay out on deposits. As interest rates around the world gradually start to edge up these institutions should see an improvement in their profits.


Writing in their latest factsheet, Nick Brind and John Yakas, the managers of the Polar Capital Global Financials Trust (LON:PCFT), the only investment trust that specialises in this area, said: “If….. interest rate expectations turn up then we would expect the financial sector’s performance to pick up sharply. On any long-term investment horizon, interest rates remain at historical lows and financials are a natural hedge for when that changes.”

The financial crisis resulted in widespread distrust with the sector, but the dire nature of the situation that these companies found themselves in and the tougher regulatory requirements have forced them to improve the quality of their balance sheets and earnings. In many cases this is yet to be fully reflected in their valuations.

Polar Capital has a globally diversified 72-stock portfolio with 60% of its £305 million of assets invested in banks and the rest in other financial stocks. The shares are up 61% over three years and are yielding 2.5%.

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There are also several specialist open-ended funds that invest in the sector, although these tend to be slightly smaller in the £50 million to £100 million bracket.

A good example is the £51 million Jupiter International Financials Fund that has returned 112.2% over five years. This was marginally ahead of the 110.3% produced by its MSCI ACWI/Financials benchmark.

The manager, Guy de Blonay, has invested the majority of the fund’s assets in Banking stocks with the geographic exposure mainly divided between Continental Europe, the US, Asia Pacific ex Japan and the UK.

In his latest update he said that synchronised acceleration in global growth is still ongoing, which is supportive for interest rates, especially in the US, and it is obviously very good for financials.


“We believe that there are still three important catalysts for US financials: the positive outcome of this year’s Comprehensive Capital Analysis and Review, with several big banks subsequently increasing their share buybacks; the reduction in volatility of US banks’ quarterly earnings; and an increasing proportion of profit growth turning into free cash flow.”

The other financially orientated open-ended funds have tended to lag slightly behind their benchmarks over the last five years. They are Henderson Global Financials, AXA Framlington Financial, and JPM Global Financials.

More mainstream equity funds will also have an exposure to the Financials sector, although it will only make up one element of the overall portfolio.