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Management Quality

  • What is quality ? I don’t think there is a single investor who won’t tell you they invest in quality management. But I am yet to find an instruction manual that can tell us what quality of management looks like. And they don’t teach you how to find it. Sometimes we see incentive schemes which are wrong such as Provident Financial, a sub-prime lender, being incentivised to achieve EPS growth, a dangerous strategy. But with companies at different stages of their lifecycles and in different industries it is notoriously hard to generalise as to what constitutes quality. 
  • Exchanges Xavier Rolet, who having left the LSE is now CEO designate at CQS, knows a bit about exchanges. He commented on the setting up of a rival exchange to NYSE and NASDAQ called MEMX by a group of Wall Street firms including Fidelity, Morgan Stanley, BAML, UBS, Citadel, Schwab Etrade etc. He questioned whether this would happen if customer service, fair pricing, innovation and trusting relationships were at the heart of exchanges business models. 
  • But we can generalise Such outspoken candid views are what made him very effective and also ruffled feathers at the LSE. But it is quality and applies to all industries. It occurs to me that we hear much about growth and business models as investors but rarely have I heard investors ask management about customers, trust, fairness and innovation when those are the necessary ingredients for success.  Any management who put that at the front of their financial statements would go in my quality corner. Note to self – when meeting management always ask about customer service and trust, fair pricing and innovation.

Rathbone – Q4 Update 

Share Price 2484p

Mkt cap £1.37bn

  • Update AUM was £44.1bn. In investment management net inflows over 3 months were 1.4% and 2% in the unit trusts. Encouragingly deferred consideration for Speirs and Jeffrey will be paid out early implying the integration is possibly proceeding ahead of expectations.
  • Estimates Forecasts are for £311m revenue for the year to Dec 18 and £72.9m PAT which is EPS of £143.5p. In 2019 consensus looks for 14% revenue growth and 9% EPS growth. In the light of AUM being 12.8% ahead of 12 months ago that may be manageable but the downgrade for market weakness is possible on results on 12 February 
  • Valuation Rolling 12 month forward PER is 15.9X and yield 2.8%. Brewin trades at 14X with a 5.4% yield.
  • Conclusion Shares look up with events in the light of market uncertainty. In the light of management changes coming I find myself wondering if we finally get the long rumoured merger of Rathbone and Brewin this year. 

Premier Asset Management – Q1 Update

Share Price 182p

Mkt Cap £187m 

  • Update AUM was £6.4bn with net inflows for the quarter of £65m 
  • Estimates Revenues for the year to Septmeber 19 are expected to be modestly up at £54,2m which provides 6% adjusted EPS growth as when results were announced in November AUM stood at £6.6bn despite against an average of £6.5bn over the year to September 18. 
  • Valuation PER 11 yield 6.3%. The shares are 40% down from their high of 303p when they simply got too expensive. 
  • Conclusion These shares are too cheap. Performance is strong and there are no performance fees in the numbers. 

Polar Capital – Q3 Update 

Share Price 488p

Mkt Cap £459m 

  • Update £12.7bn AUM compares to £14.7bn at 30 September. That implies net outflows of £284m in Q3 which is 2% of AUM. It is also why they haver omitted Q3 flows from this announcement I imagine.  Performance fees were strong for the year at £23m vs £15m last year. 
  • Estimates Revenue estimates are for a £23m improvement in the year to Mar 19. £8m of this looks likely to come from performance fees implying an underlying c 10% revenue increase. AUm are 8% ahead of December 17 so this looks reasonable
  • Valuation EV/AUM 2.8%. PER 10.7, yield 7.2%
  • Conclusion Shares are 33% off from their highs and are now cheap. The company will recover from the net outflows so it is now in attractive territory

Jupiter Fund Management – Trading Update

Share Price 304p

Mkt cap £1.39bn 

  • Update Net outflows in the quarter £1.5bn of which £1.3bn were from fixed income taking AUM to £42.7bn 
  • Estimates Estimates for 2018 assume £410m revenue, a 10% decline from 2017. For 2019 estimates assume a further 5% revenue decline. AUM is now 16% below where it was a year ago so there is a risk of further downgrades 
  • Valuation EV/AUM is 2.6%. PER 10.6 and yield 8.3% 
  • Conclusion Share Price has now halved over the last 12 months and it is now in value territory. If it wasn’t structurally in a difficult place it would be the time to buy it but with fund managers momentum can kill so it is dangerous to buy a company in a structural bind. I suspect things get a bit worse yet.