Having done well over the last 12 months, Lloyds (LSE: LLOY) shares lost their mojo today. Its 4% fall is greater than the roughly 2% tumble in the FTSE 100 index as a whole.
Is this an opportunity for those like me who aren’t already invested or are there better options out there?
Lloyds shares: UK bellwether
It’s clear that Lloyds has been caught up in the concern surrounding rising Covid infections in the UK. Unfortunately, this is the nature of the beast with the bank as it’s seen as a bellwether for the UK economy. And right now, the recovery of that economy is under question. The worry, in addition to rising infection levels and hospitalisations, is that too many people simply can’t work as a result of needing to self-isolate.
We won’t know the full impact of Boris Johnson’s decision to remove restrictions for a while. Professor Neil Ferguson believes the optimistic outlook is a peak of this latest wave of infections around August to mid-September. Whether we see further downward pressure on Lloyds shares in the meantime is hard to say. However, we do know that the market isn’t a fan of uncertainty.
As always, deciding if this represents an opportunity or not depends on my risk tolerance. For me, there’s a potentially safer way of making money from the sector, in good times and bad. Step forward the Polar Capital Global Financials Trust (LSE: PCFT) — the only one of its kind listed on the UK stock market.
A safer alternative?
Over the last year, its share price is up 83% — getting on for double what Lloyds shares have achieved. Importantly, these numbers take into account today’s drop.
One reason is the trust’s global reach. Almost 45% of its assets are invested in US financial stocks. Only 11% or so of its money is invested in UK shares. While banks make up the lion’s share of holdings, insurance firms and software providers also feature. This ‘safety in numbers’ approach has clearly worked over the last 12 months.
On the downside, PCFT has a high ongoing charge of 1.09%. Naturally, I wouldn’t face such a fee if I just bought and held Lloyds shares (apart from platform costs). The diversified nature of the trust also means that I won’t be able to capture much of the big uplift to UK banks’ (and especially Lloyds) share prices that might happen once Covid is knocked for six. This is the concentration vs diversification quandary that Warren Buffett has frequently commented on.
Perhaps most importantly, Lloyds shares aren’t held by the trust. So, I would need to consider whether Lloyds shares could outperform PCFT going forward. If so, and I was comfortable with just owning one stock, it would make sense to back Lloyds.
Time to buy?
I tend to steer clear of buying banking stocks directly. Even in normal times, their complex nature makes me think I’d struggle to pick a winner. As implied above, the sector is also dependent on so many factors out of its control. Still, I do think the Polar trust offers a more palatable way for me to play the eventual recovery.
With things potentially getting worse before they get better, however, I’m continuing to give Lloyds shares a wide berth for now. I’d take today’s share price action as a warning.