Fund managers investing in Hargreaves Lansdown are torn on whether to add to positions as the company readies the next phase of its Retail Distribution Review (RDR)-friendly business model.
While Hargreaves shares have risen 63% over the past 12 months, Newton’s Richard Wilmot (pictured) expects volume growth to provide another leg-up for the company, as it moves to change its charging structure.
Wilmot introduced Hargreaves to his £2.2bn Newton Higher Income fund this year.
“Assets under management at Hargreaves are relatively low for the size of the market opportunity. They have got the potential to grow even in a falling market,” he said.
“AUM at Hargreaves is relatively low for the size of the market opportunity. It has the potential to grow even in a falling market” Newton’s Richard Wilmot
But with the group about to introduce a new fee structure as the industry moves away from the old commission model, others are more circumspect.
Nick Train, manager of the £708m CF Lindsell Train UK Equity fund, holds 6.4% of his portfolio in Hargreaves.
He described himself as a “happy holder” of the stock but said he has not been actively adding to his position in recent months.
Similarly, Liontrust’s Anthony Cross and Julian Fosh have allowed their position in the stock to dilute over time.
Cross said uncertainty prompted by the change in regulations means the pair are holding less of the company than they would otherwise want.
They sold part of their £250m UK Growth fund’s stake in Hargreaves earlier this year, and the stock now accounts for 0.5% of their £1.1bn Special Situations portfolio and 1.1% of UK Growth.
“It is not a big holding any more, which is a pity because it is due to the regulatory risk rather than a dislike of the company,” said Cross.“The worry is not that Hargreaves loses market share, but whether it can, in effect, switch one form of revenue stream for another.”
Train remains confident the wealth manager will not be forced into major concessions on price.
“We have no idea how things are going to work out in miniscule detail, but when a company is offering something its customers clearly value so much, there will likely be a charging structure that satisfies all parties,” he said.
Securing the right model will be crucial to Hargreaves’ future revenue stream, which could have an impact on dividends as well as growth.
Hargreaves already has a relatively high dividend payout ratio at around 60% of earnings, but Wilmot argued cashflows justify holding the stock for income.
“We are generally more comfortable with lower payout ratios [in the financials space], but Hargreaves is a very asset-light model,” he said.
“In terms of dividend growth, the lever is not a change in the ratio, it is the operational cashflow in the business.”
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