As commentators including Moody's predict a surge in assets under management this year, Rebecca Jones asks whether fund houses are a sound investment.
Nick Train, director, Lindsell Train
We have owned the asset managers we hold for a long time - over ten years for some. We have been buying them for long-term reasons, not because we expect the stock market to do very well or because Moody’s says this is going to be a good year for them.
Regarding Moody’s observations, surely the stock market knows this already. All of the asset managers - certainly the ones we own - went up a lot last year: Schroders increased 60%, Hargreaves doubled in value and Rathbones was up 30%.
I own these companies and regard them as integral parts of our strategy. However, if you were to ask which part of my strategy will do best next, I would not say these fund management companies simply because they did so well last year.
Are UK asset managers a buy?
In the short term, the share prices of these companies are determined by the net surprise in markets and predicting short-term movements is really difficult. The only way you are going to do it correctly is if you call unexpected moves in the market. Very few people get that right.
I do not want to appear holier than thou, though I probably do, but our perspective on these companies is that we try and ignore what might happen next in the stock market.
What we look at is the fabulous business economics of the fund management company. Certainly, in terms of the ones we own, over time that has led to really strong share price performance.
The industry does not like to broadcast this but the fact is asset management is an extraordinarily profitable business. It also has scale and, all things being equal, these are good things to invest in over time.
Tineke Frikkee, UK equity, income manager, Smith and Williamson
Overall, I think equity markets have further to go this year. We have not had a great start but, as economic growth comes through, earnings momentum should deliver.
However, you need to be very stock specific. Rathbones is a good business but, at 16x P/E, it looks a little expensive to me. On the other hand, I like both Aberdeen Asset Management and Jupiter.
Aberdeen is the cheaper of those two, with a P/E of 12x to the end of September 2014 and 13% earnings per share (EPS) growth, which does not account for the SWIP deal closing at the end of March.
People still think Aberdeen is a 100% play on emerging markets, which are doing poorly right now; however, certainly after the SWIP deal closes, it has a 20% exposure to emerging markets, which is the same as Schroders.
Jupiter is more UK equity focused and is on a P/E of 15x, with a dividend yield of 3.5% and the forecast for EPS is 11%. Its balance sheet is really strong, so we are probably going to get a hike in the dividend or maybe a special dividend or a big share buyback.
Macro drivers do tend to wax and wane in the short term but I am less concerned about the short-term numbers. It is clear GDP growth this year will be higher than in 2013, while equity inflation is pretty stable. Overall, that is a positive trend for the economy and for businesses.
Valuations do matter, though. In January, markets reached a point where stocks looked pricey and some companies surprised on the downside. With high valuations, you really have to grow your earnings into your multiple, so you need to make a judgment there.
Rob Gleeson, head of research, FE
The asset management sector is sensitive to economic conditions: it has high operational leverage so, when markets fall, most asset managers experience outflows. This reduces revenue derived from management fees, while costs such as staff stay fixed. Likewise, when markets improve and assets flow in, revenue increases while costs remain broadly static.
While economic conditions are improving, and some asset managers are experiencing strong inflows, these tend to be concentrated to specific regions. Those with a focus on the UK are doing well, while those with a bias to emerging markets are still seeing outflows.
There are other pressures on UK asset managers, such as a squeeze on pricing following the RDR and heavy concentration among retail funds. This concentration has seen firms such as Schroders and Invesco hit by big name managers leaving, which has impacted their assets under management.
Finally, with financials starting to come back into fashion, much of the value is beginning to disappear. Having gained nearly 65% in the last two years, Schroders is now trading on a P/E multiple of 21, compared to 15 at the height of the market in February 2007 - although this is roughly in line with the sector itself.
For the contrarian, Aberdeen has seen its stock fall 3% in the last three months but is still up 80% over the last two years. It is trading on a P/E of half what it was in February 2007.
The stock makes up 4.2% of the Liontrust Macro Equity Income fund. For other indirect methods of exposure, the Cavendish UK Balanced Income fund holds 2.3% in Henderson, Baillie Gifford UK Equity Alpha has 4.1% in Schroders and Aberdeen UK Mid Cap Equity has 2.9% in Rathbones.
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