• Fund Managers and Other Animals -We have a note out today offering some perspective in a world where most broker research is short term. We compare the quoted fund managers to where they were in 2010 and find that some have got not very far while others have travelled a long way.  We then look at flows and introduce a 1 year trailing weighted performance measure to see where they go next.  Please email if any one wants 12 months of notes for £1k +VAT.
  • Man Group – whose profits are lower than they were 10 years ago – confirms another restructuring yesterday moving the holding company to Jersey and renaming it “New Man Group”.  Sounds a bit like a high street retailer to me.
  • Financial Services Fees
  • Octopus conducted a survey of 275 financial advisers and found 77% believed the UK would move to a subscription fee model instead of an asset based charge. Interactive Investor are the only platform in the UK to adopt this model and Charles Schwab in the US have recently moved from an asset based charge to a subscription model. 
  • If this model becomes the norm for financial advice I find myself wondering when it may arrive in the fund management space too. It would decimate the super profits of some fund managers who run large global funds while potentially lowering the barriers to entry for small funds.  Which would move the landscape in favour of niche products away from large cap product.  Just like with research I find myself thinking

Quilter Plc– Trading Update

Share Price 156p

Mkt Cap £2.98bn

Disclosure: No holding

  • Update Net inflows (described as NCCF) were 0.5% bringing total AUM with market tailwinds to £114.9bn up 5.1%.  Wealth and Advice experienced 0.7% net inflows while the platforms experienced net outflows of £1.5bn (2.2%) and the life book experienced outflows of £0.8bn (6%). A £0.2bn portfolio loss is expected to impact Q2.
  • Estimates Anticipate 12% EPS growth this year
  • Valuation Per 14X Yield 3.5%. But this should really be a SOTP valuation. Advice and Wealth made £102m PBT last year which may be worth £1bn. And apportion 75% of the profits in the platform business putting them on a PER of 16 and the balance of 25% from the life book on a PER of 5 we get c. £2.5bn market cap.
  • Conclusion The shares look quite pricey for a business with modest flows. The acquisition of Lighthouse bring a network of self employed adviser which will need a lot of sorting out. Struggling to see the attractions here.

Record PLC – Trading Update

Share Price 28p

Mkt Cap £56m

Disclosure: No holding

  • Update AUM was down 0.9% with net outflows of £3.4bn over the 3 months to March up from £1.1bn the previous quarter. Client number unchanged at 65 and fee rate unchanged.
  • Estimates The anticipated 3% revenue growth looks hopeful to March 19 but the statement suggests trading is in line. 2020 estimates assume a 10% revenue fall.
  • Valuation Per 12, yield 8%
  • Conclusion This business looks like it has lost its way and is priced accordingly. The 8% yield may have attractions but better returns may be found elsewhere.

jeremy@charltonillingworth.co.uk

News

  • Congratulations to Morses Club for their recent win at the “Complaints Handler of the Year” awards.  I imagine there is less fighting than there would be at the “Fund Manager of the Year” awards
  • Patrick Snowball publishes a letter to PFG shareholders urging them to take no action
  • Twitter poll yesterday:

Tatton Asset Management – Trading Update

Share Price 231p

Mkt Cap £129m

Disclosure I hold

  • Update AUM is up 25% over 12 months to £6.1bn. Over 6 months from September the AUM is up 7%.  Paradigm mortgages increased its member firms by 14% to 1393.  But fee pressure in the consulting business results in no growth there.
  • Estimates Zeus forecast £7.8m PBT from £17.5m revenue for the year to March 2019. This is based on average AUM of £5.5bn which looks to be in line with expectations while a modest reduction from £9.1m revenue to £8.8m was expected in mortgages and consulting which looks reasonable.
  • Valuation Current PER 19 Yield 3.5%
  • Conclusion  The growth driver is likely to be the asset management business which currently accounts for c. half the revenue.  This growth story is in tact. I would like to understand why the fee pressure for the consulting business is not apparent at Simplybiz but it is for Tatton.  No catalyst to move the shares onwards today but the law of small numbers should mean that this will produce a good return from the growth in asset management.

City of London Investment Group – Trading Update 

Share Price 399p

Mkt Cap £107m

Disclosure No holding

  • Update Net inflows were 3.1% over the period but AUM overall were up 14% in three months to $5.3bn. Run rate revenue yield is 76bps and so the run rate profit is currently £1.5m per month
  • Estimates Forecasts are for £31m revenue, a decline of 5.5% over the year to June 19.  Current revenue run rate is c $40m from $5.3bn AUM in line with forecasts though profitability looks a little ahead of forecasts in terms of the £18m run rate.
  • Valuation PER 11.5X, Yield 7.2%
  • Conclusion Reassuring update.  Very cheap. Too cheap but I do worry about the management change. Perhaps this business will succumb to a bid this time with many of the fund managers having excess cash at this point in the cycle.

Ashmore Group – Trading Statement 

Share Price 455p

Mkt Cap £3.06bn

Disclosure No holding

  • Update 6.5% net inflows combined with help from markets help AUM to rise 11.2% over the quarter to $85.3bn.
  • Estimates assume a 5.5% increase in revenue over the 12 months to June 19. With AUM now up 11.5% over the 12 months this looks light
  • Valuation EV/AUM 3.2%. PER 17.5X yields 4%
  • Conclusion Expensive but it usually is. I sense the market underestimates the fee margin contraction in this specialist asset class suggesting that perhaps the best returns have been had from this high margin business.  But this is a positive update

jeremy@charltonillingworth.co.uk

Lender News

  • Very unfortunate that NSF Plc, in the midst of their bid for Provident Financial were forced to put out a statement saying they may have paid distributions wrongly between subsidiaries where there may not have been adequate distributable reserves.  Still with Malcolm Le May, CEO of Provident, heading up IG Group’s nomination committee where the Chairman has resigned he is busy so perhaps it won’t be seized upon.  Aided of course by NSF releasing their announcement at 5.04pm on Friday.

Brewin Dolphin – Talks

Share Price 330p

Mkt Cap £937m

Disclosure No holding

  • Talks Following the Sunday Times reports over the week end Brewin confirms it is in exclusive discussions to acquire Investec Wealth’s Ireland business.  Rathbone is also reported to be interested in buying the business but it appears they have been pipped by Brewin. The price is alleged to be Euro 60m (£52m).
  • Estimates No AUM number is quoted. If we made the heroic assumption that it equates to 10X EBIT given Brewin is paying cash this could potentially be 6-7% earnings enhancing.
  • Valuation Current PER 15.4 Yield 5.0%. EV/AUM 1.8%
  • Conclusion  The EV/AUM for Brewin is very low as the cash has been building up in the balance sheet. To use the cash for acquisitions would be usefully enhancing when things are quiet.  The sector has been dull over the last 12 months as flows have reduced (see chart below). Brewin shares are down 7% over 12 months.  With a 5% yield they are starting to look cheap.

Kingswood Wealth – FY Results 

Share Price 8p

Mkt Cap £13m

Disclosure No holding

  • Update Revenues down 6% to £8.8m. Losses of £3m in the core business (2017 £1m). and a number of exceptionals for staff depatures and debt and acquisition costs. Cash is £2.4m and there is a convertible debt facility of £4.9m.
  • Estimates Forecasts are for £11.8m of revenue in the current year but revenue came in at £8.8m versus an expectation showing on my screen as £9.3m. 
  • Valuation 1.3X revenue. Charles Stanley is valued at 0.5X revenue
  • Conclusion This is a small company with big ambitions in the global wealth sector and private equity style facilities to help it get there.  I suspect it will try and do too much too quickly and suffer a number of accidents. The high staff turnover would suggest the staff think so too. Note to self: stand at safe distance.

jeremy@charltonillingworth.co.uk

I don’t mean to go on but……………..

Man Group – Trading Update

Share Price 141p

Mkt Cap £2.2bn

Disclosure No holding

  • Update. Net outflows of 0.6% over the quarter to March but AUM was up 4% to $112.3bn. The most significant culprit was the discretionary long only portfolio driven by global, Japanese and US equity strategies where net outflows were $1.8bn. Fund performance is variable but the majority are in positive absolute territory in Q1.
  • Estimates Are based on 5% revenue growth for the year to December 2019 which looks sensible with AUM flat on last March.
  • Valuation PER 10.4 Yield 5.8%. EV/AUM 2.0%
  • Conclusion  I admire the reinvention of a business that was mainly AHL a few years ago and having invested the cash flow in acquisitions AHL is now under 20% of the AUM. There may be a time it can reinvent itself but it still looks a little early. Hard to see the catalyst just now.

Polar Capital – Trading Update 

Share Price 510p

Mkt Cap £483m

Disclosure No holding

  • Update Net inflows of 0.5% is a turn round from last quarter when outflows were 6.7%. AUM up 9% to £13.8bn. Over 12 months the AUM is up 15%.
  • Estimates For the year ahead a reduction in revenue is expected of £22m which is the performance fees of £23.6m not expected to recur in year to March 2020.
  • Valuation PER 12.8X yield 6.4%. EV/AUM 2.7%
  • Conclusion This is a volatile youth. The shares could be very cheap if the funds perform. The UK absolute return fund has proved to be very market sensitive which may take some time to recover from.  Momentum may take time to rebuild but the shares are cheap.

Charles Stanley – Trading Update

Share Price 277p

Mkt Cap £141m

Disclosure: No holding

  • Results FuMA was up 5.7% over the quarter to £24.1bn.
  • Estimates March 20 forecasts look for 1% revenue growth but 20% earnings growth despite the fact that margins are expected to be under 10%.
  • Valuation PER 14.9X yield 4.0%
  • Conclusion The company’s 15% margin target remains elusive. With the company achieving 8% ROE its hard to see the attractions.

Alpha Financial Markets Consulting – Pre Close Update

Share Price 254p

Mkt Cap £257m

Disclosure: No holding

  • Update Revenue and EBITDA expected to be in line with expectations.
  • Estimates Anticipate 15% revenue growth to £76m and 11.6p EPS
  • Valuation PER 19X and yield 2.5%.
  • Conclusion Expensive for a consultant that charges premium rates to fund managers. But it continues to deliver strong growth and changes in the financial markets show no sign of letting up.  Just hard to see the positive surprise here.

jeremy@charltonillingworth.co.uk

Unicorns

  • As Pinterest prices at the lower end of expectations which at $12bn is below its private fund raise valuation I find myself watching this graph that shows that 40% of Russell 2000 companies are loss making. Admittedly there were more loss makers in 2003 and 2009 but that was because of EPS. This time its because capital is priced down rather than EPS.

Liontrust – Trading Update

Share Price 607p

Mkt Cap £308m

Disclosure No holding

  • Update. 5.2% net inflows in the quarter resulting in a 13% increase in AUM to £12.7bn. Economic advantage team gets a mention (49% AUM) but the fixed income team have brought in £419m in the first year and the increasingly fashionable sustainability team (29% AUM) gets a mention. Fund performance remains generally strong
  • Estimates The 5% revenue increase anticipated should be a walk in the park for the year to March 2020 in the context of a 21% increase in AUM over the last 12 months.
  • Valuation PER 12.3. Yield 4.4%. EV/AUM 2.2%
  • Conclusion  If we assume EPS should be 55p rather than the 49p forecast for the current year and put it on 15X that would be 800p per share against the current 607p. 

Miton Group – Trading Update 

Share Price 60p

Mkt Cap £104m

Disclosure I hold

  • Update Net inflows of 0.1% result in AUM up 5.1% over the three month period to £4.6bn. Over 12 months the AUM is up 12%.
  • Estimates Following a downgrade in February current year estimates assume a revenue decline in the current year. Looks too conservative.
  • Valuation PER 13.7X yield 3.7%. EV/AUM 1.7%
  • Conclusion The valuation is low but this is an earnings play more than a valuation play.  As the company garners more AUM the margin will grow as well as the valuation.  In general the reporting fund managers are performing well. But Polar and Jupiter are taking a little longer to add up their numbers.

Frenkel Topping – FY Results

Share Price 28p

Mkt Cap £21m

Disclosure: No holding

  • Results Revenue up 5.5% to £7.7m has resulted in a decline in operating profit to £1.7m following a year of investment.  AUM was up 3.6% over the year to £779m. Outlook is optimistic with current trading said to be encouraging. Net cash equivalents was £2m
  • Estimates Dec 19 estimates are for £2.1m PBT and 2.4p EPS from £8.6m revenue.
  • Valuation PER 11.7X yield 6.4%
  • Conclusion Lighthouse has just been taken over at 18X multiple. At this valuation I suspect either the company will grow or succumb to a rival.  Both outcomes would be attractive to shareholders.  And hats off to the company for getting “Impact investing”, “Digital innovation” and “challenger” into the commentary.

jeremy@charltonillingworth.co.uk