The fund management industry is currently undergoing big structural and regulatory changes, brought around by both the introduction of MiFiD II and the FCA’s study into competition and transparency within the industry.
But fund managers are still attractive businesses to invest in, and the investment rationale looks to be pretty simple. Their cost base is fixed, so as long as they can continue to grow their assets under management, profit growth will outpace expectations and margins will continue to be high.
For this reason, they are also highly cash generative businesses – and there’s not a lot to spend cash on. As James Henderson, director of UK investment trusts at Janus Henderson, notes with regards to his investment in Miton (MGR): “You don’t have to put up another plant if you double your sales; you just have to get Gervais Williams to work a bit harder.”
The cash on the balance sheet can be used for acquisitions or returned to shareholders in the form of dividends. For those at the smaller end of the market, that’s a bonus because not many small-caps pay dividends.
There are risks, of course. By their nature, they are a levered play on the stock market and therefore see their fortunes rise and fall with investor sentiment. “If the bull market continues you should do well; knock 10% off the market and the earnings come back more than 10%,” adds Henderson.
There are a number of larger fund management companies listed on the stock market, but there is also a small selection listed on AIM. We run the rule over a trio of them below.
Impax Asset Management (IPX)
Good-quality boutique asset managers can attract loyal followers, and Impax has successfully carved out a niche in the market. There is a growing trend both in the UK and worldwide for sustainable investments. And that is likely to continue to rise as more and more millennials become engaged with their investments.
Impax was one of the first on the scene, with its flagship near-£500 million investment trust Impax Environmental Markets (IEM) launched in February 2002. They have added to their fund range over the years, but have remained focused on sustainability.
This, according to Ken Wotton, manager of the LF Livingbridge Micro Cap fund, leaves them well-placed to benefit from a continued increased in the shift towards sustainability-type products. That demand should drive assets under management forward.
“The capability they have is going to be attractive for larger asset management firms who want to take advantage of that trend,” he adds.
Assets under management growth has been seen in recent years, and the recent acquisition of US-based Pax World Management took them past £10 billion, which is a “psychologically important milestone”.
In fact, assets grew 51% in the six months to 31 March 2018 to just over £11 billion. Wotton is supportive of the Pax buy, despite acquisitions of US corporations by UK-domiciled entities being risky. He says Pax is a “low-risk transaction”, as the pair have been working together for 10 years so “they know the business very well”.
Another string to its bow is its private equity mandates, which tend to be higher-margin and also gives them diversification in regards to their end clients. They are also long-duration vehicles.
Wotton believes Impax has the scope to more than double its assets under management over time. But it’s also reasonable to assume it may become a takeover target itself in the long run. Something similar to Liontrust’s acquisition of Alliance Trust’s sustainability mandates.
In the meantime, the balance sheet remains strong, as proven by recent results in which it promised a 2.6p special dividend and hiked its interim pay-out by 57% to 1.1p.
The share price has almost trebled in the past 18 months and nearly doubled in the past year. But Wotton says it’s not actually trading on that high a multiple, at 16 times forward earnings. “That is a bit above the market, but it’s growing a lot faster than the market and it should fall quite rapidly.”
Miton Group
Miton is another asset manager with a streamline range of funds and investment trusts. It runs a suite of multi-asset offerings, in addition to its US, UK and Europe-focused equity vehicles. They are all currently performing well, which Henderson says is helping them grow assets under management. Assets grew by almost a third in the year to 31 December 2017.
But that hasn’t always been the case. In 2015, its multi-asset funds went through a period of outflows which was remedied by the acquisition of Darwin. That purchase brought fund managers David Jane, Anthony Rayner and Henna Hemnani in to run the mandates.
Further outflows followed in its UK Value Opportunities fund when George Godber and Georgina Hamilton left, but new manager Andrew Jackson has reversed that. Now, it seems to have stabilised its team of money managers.
The firm has also slimmed down the board, promoting David Barron to chief executive and appointing former CMC Markets boss Jim Pettigrew as chairman last year.
In that time, margins have shot up from 6% to 25% with final results in May finally lifted the share price back to 50p, a near-five-year high.
It has around £20 million of cash on its balance sheet and last year paid a dividend of 1.4p, up 40% on the previous year and converting to a yield of 2.7%. “That should grow quite well,” adds Henderson, who owns the firm in his Henderson Opportunities Trust (HOT).
At 14 times last year’s earnings, Miton is more attractively valued than Impax. In fact, while the stock has doubled since Graham Bird, manager of Gresham House Strategic (GHS), bought it, he still thinks it’s undervalued.
“It’s still only valued at less than 2% of assets under management compared to other businesses which are on 3.5%,” he explains.
Miton is another where, according to Bird, “there’s a reasonable chance it will be consolidated at some point”. “I’d be surprised if they haven’t had at least one approach, the question is whether Gervais wants to work with someone else.”
Premier Asset Management (PAM)
The newest entrant to the stock market in this space is multi-asset specialist Premier, which floated on AIM at 132p in October 2016. Since then, it’s almost doubled in price to 256p.
When Dan Nickols bought the firm at IPO for his Morningstar Gold Rated Old Mutual UK Smaller Companies fund, it came to market trading at a price/earnings ratio just about in the double-digits and yielding around 5%.
Despite the growth in the stock price, at a P/E of around 13.5 times currently, Nickols says he “doesn’t think it’s particularly stretched”. “It’s still trading at a small discount to the market,” he continues, adding that he has topped up along the way. “It’s not the biggest holding in the portfolio, but it just feels like a nice place to be.”
If the 2018 full-year dividend is raised in line with the 32% hike in the interim dividend announced last month, it still trades on a potential forward yield in excess of 4%.
Nickols says it’s seen as a “pretty lean, well-managed business”, which should keep costs to a minimum and help with cash generation.
“The key attraction here is that you’ve got an in-house multi-asset proposition, which seems to be delivering consistent performance and certainly is gathering assets consistently as well,” he adds.
As at 18 May, assets under management are just shy of £7 billion, up 50% since the first-half of 2016. Pre-tax profit in the first half of 2018 was up 90% to £7.9 million, with earnings per share almost doubling to 5.91p.
