Up +10% in 2020, but I’m bearish on Polar Capital

I wouldn’t be fooled by Polar Capital’s recent interim results… Nadia Yaqub takes a closer look at why the shares are a risky investment.

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Recent half-year results saw AIM asset manager Polar Capital (LSE: POLR) report strong inflows into its funds. In the six months to September 2020, Polar Capital’s assets under management (AUM) jumped 34% from £12.2bn to £16.4bn.

Several funds outperformed their respective benchmarks; however, the AUM spike was due to the technology and healthcare strategies. In the six-month period, the Global Technology Fund saw the largest inflow of £1.2bn followed by the Healthcare Opportunities Fund and Biotechnology Fund benefitting from £120m and £198m of net inflows respectively.

The tech boom

It is no surprise why the £5.7bn Global Technology Fund, managed by Ben Rogoff and Nick Evans, has performed well during the global pandemic. As people have been forced to work from home due to Coronavirus, the need for technology has increased. The portfolio consisting of stocks such as Microsoft and Amazon has benefitted from the Covid-19 tech boom.

In June 2020, Rogoff and Evans announced they were to soft-close the Global Technology fund after it had gained strong investor interest during the Coronavirus crisis. This was done to allow the fund managers to continue to meet their investment objective and deliver future returns.

While the open-end Global Technology Fund may be closed to new investors, Rogoff and Evans also manage the Polar Capital Technology Trust.

Concentration risk

While the Global Technology Fund has delivered stellar performance, investors must be aware that there is concentration risk. This investment strategy now accounts for 55% of the firm’s total AUM. The healthcare funds account for 16% of Polar Capital’s AUM.

Not only does Polar Capital have all its eggs in the Global Technology Fund, but the investment strategy is also concentrated. The top 10 holdings, including Apple and Facebook, make up 40% of the fund. The strategy also has a 69% geographical exposure to the US.

An attractive dividend

In its last financial year, the company returned a total dividend of 33p per share to its shareholders. At the time of writing, this gives Polar Capital a dividend yield of approximately 5%.

The asset manager also increased its interim dividend 12.5% to 9p per share from 8p per share a year ago. For the income-hungry investor, an AIM stock that generates a 5% dividend yield is attractive, but I believe this comes at a cost.

My bearish view

Polar Capital heavily relies on the technology strategy to generate management fees. When the wheels fall of the Coronavirus tech boom, Polar Capital’s revenue is likely to be negatively impacted.

In October 2020, Polar Capital acquired the International Value and World Value team from Los Angeles asset manager First Pacific Advisors LP. Polar Capital now has access to a US 40 Act Mutual Fund range, which will enable the attraction of US clients to its specialist fund strategies.

Although Polar Capital is taking steps to increase diversification of its investment strategies, I believe the reduction of the Global Technology Fund concentration risk will take time.

Polar Capital is also heavily reliant on the investment expertise of fund managers, Rogoff and Evans, who have created a strong reputation for themselves. Unlike the notorious demise of their peer, Neil Woodford, these two managers could decide to leave Polar Capital and launch their own fund.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Nadia Yaqub has no position in any of the shares mentioned. The Motley Fool UK has recommended Polar Capital Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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