Market review

By the end of April, equity markets had staged a notable recovery from their initial negative reaction to the announcement of new trade tariffs by President Trump earlier in the month. Global equities, as per the MSCI All Country World Net Total Return Index ended the month up 0.9%, in US dollar terms, although the index declined 2.5% in sterling terms, reflecting continued dollar weakness.

We believe the rebound reflects the market’s reassessment of the tariff announcements, which were subsequently watered down through delays and exemptions. While uncertainty remains around the broader economic impact and potential implications for consumer health, the continuation of negotiations suggests a more pragmatic approach is prevailing. As a result, fears of a worst-case scenario appear to have receded.

It is particularly noteworthy that global financials outperformed the broader market during this volatile period. The sector is up year-to-date, in sterling terms, compared to a 6.7% decline for global equities.

The Trust’s net asset value fell 1.8% in April compared to a 2.4% decline by the benchmark, the MSCI All Country World Financials Net Total Return Index. The positive relative performance was supported by the Trust’s overweight position in trading platforms, European banks and certain emerging markets, primarily Latin America. This was partially offset by weakness in Japanese banks, US life insurance and the underweight position in Australia.

Portfolio activity: responding to Tariff-related volatility

During the month, we repositioned the Trust to reflect near-term risks associated with the new US tariffs.

We reduced exposure to US financials and took steps to de-risk our regional allocation. Specifically, we trimmed holdings in US banks, including Citigroup, to reflect a potentially tougher macroeconomic backdrop and the risk of rising loan losses, albeit from currently benign levels. We also cut exposure to consumer finance companies, including American Express, given the likelihood that corporates will pass higher input costs onto consumers.

We further reduced our exposure to capital markets-sensitive names, such as Alternative Asset Managers and Goldman Sachs, due to a slower-than-expected recovery in IPO markets, which had been anticipated for 2025.

We reinvested this capital into more defensive holdings in the US (Berkshire Hathaway) and increased our weighting in quality Canadian banks (Royal Bank of Canada) in which we have been underweight.

In Europe, we have been overweight in several trading platforms as we believe they will be beneficiaries of consumers taking greater control of their investments. In April, we added to these holdings (Plus500; IG Group Holdings) as they are direct beneficiaries of elevated trading activity that we feel will likely follow the recent volatility.

Having been overweight European banks, we had slightly reduced our holdings ahead of Liberation Day and purchased put options to protect the portfolio from potential weakness in the sector.

We also used the market volatility to initiate positions in long-term structural winners. Notably, we added London Stock Exchange Group (LSEG), a leading global data provider and owner of the London Stock Exchange, and FinecoBank, an Italian platform gaining market share through its low-cost offering.

We are encouraged that the Trust has navigated the recent volatility well, underscoring the benefits of our more active and balanced approach.

We had been significantly underweight emerging market financials for some time due to a tight liquidity environment and slowing growth. With liquidity conditions easing in several markets and domestically driven economies such as India being relatively insulated from tariff threats, we have added to some high-quality emerging market financials.

For example, we bought a new position in HDFC Bank, a leading Indian bank that stands to benefit from the regulatory easing of liquidity conditions. We also bought a new position in NU Holdings, a rapidly growing lender across Latin America.

While the long-term implications of the tariff regime remain unclear, we remain ready to reposition the portfolio as needed. We are encouraged that the Trust has navigated the recent volatility well, underscoring the benefits of our more active and balanced approach.

Q1 2025 reporting highlights

As Q1 earnings season concludes, it is encouraging to see most of our portfolio holdings delivering solid performance to start the year.

• US banks reported resilient net interest income and strong trading revenues. While we have been reducing exposure to the subsector, we were reassured by the confident message during the Q1 earnings call from Jamie Dimon, CEO of JP Morgan, about the bank’s resilience, a longstanding holding in the Trust: “We're not guessing about what the future is going to hold. Obviously, if you look at our numbers, we have the margins and capability to get through just about anything.”
• US P&C insurers experienced losses from the California wildfires but continued to generate solid underlying returns. Arch Capital and RenaissanceRe Holdings noted that commercial (re)insurance pricing is moderating but from elevated levels, leaving room for further book value growth. We continue to avoid exposure to US casualty reserve risks and were pleased to see no prior-year reserve deterioration in our holdings.
• European trading platforms delivered strong Q1 results, supporting recent outperformance. Plus500, for example, reported 13% year-on-year revenue growth and improved revenue per user, with promising growth from new areas such as US futures which it expects to generate 30–35% revenues over the next 3-5 years.
• Exchanges and data providers continued to show dependable growth. LSEG, a new addition to the portfolio, delivered 8% organic growth and is benefitting from its partnership with Microsoft. We believe the company’s transition into a leading data provider supports a potential rerating towards multiples seen in US peers.

Outlook

We see the recent volatility from the US tariff announcements as a constructive entry point for financials. Q1 results have reaffirmed our conviction in the sector’s attractive returns and resilience. We believe market sentiment remains overly cautious, influenced by outdated ‘muscle memory’ from past cycles. Given consensual underweight positioning by investors and attractive valuations, we believe it would take a severely negative macroeconomic scenario to end the sector’s relative outperformance in recent years.

In our view, several factors support a positive outlook:

• Stronger fundamentals: To our mind, the sector is in its best shape in years. Banks, insurers and diversified financials are delivering improved operating performance and have demonstrated resilience through both the pandemic and recent volatility. A return to more normalised interest rates further enhances return potential.
• Thematic tailwinds: The sector benefits from strong thematic tailwinds. There are strong structural growth trends in retail investment platforms, private assets and emerging markets. We also believe regulatory easing will be a powerful driver and this will likely increase M&A activity over time.
• Attractive diversification and valuation: Financials can help clients diversify their holdings away from growth-oriented sectors. Valuations across financials remain attractive relative to history and other sectors. The sector has outperformed both global equity markets and value indices in three of the past four years, and this has continued in 2025. If the market further rotates out of growth-oriented sectors, this would be a further tailwind.

We remain confident in our positioning and believe the Trust is well placed to navigate further uncertainty while capturing opportunities in high-quality, attractively valued financials globally.