A Great British Success Story

Wednesday, Sep 05 2012 by
3

A company I have long admired is Hargreaves Lansdown (HL.), a retail investment broker co-founded by two former accountants — Peter Hargreaves and Stephen Lansdown. They founded the company in 1981 with just £500 each and turned it into one of the UK’s largest independent financial service providers. Today, the company is a FTSE 100 giant with over £25 billion of assets under administration.

Secret of success

In an interview with the telegraph, Peter Hargreaves put HL’s phenomenal success down to “giving clients what they want”. Speaking in the Daily Telegraph, he said:

“If you call our helpline, a real person answers. If we say we will get back to you, we will. Emails are answered within four hours and letters answered by return of post.”

It sounds beautifully simple. They pride themselves on delivering a “knock your socks of customer service”, as a delighted customer I can testify to this. The firm’s philosophy of putting clients first is underpinned by its marketing strap line “to provide the best service, the best information and the best prices”, displayed on the front page of its website.

A Competitive Advantage

When looking for great companies, one of my most important criteria is to identify businesses with large economic moats. In this case, HL’s competitive advantage is its flagship vantage service. This is a wrap platform which allows clients to manage all their investments under one roof; it’s essentially a one stop-shop for your investments.

Also, while most of its competitors in the platform market sell through Independent Financial Advisors, HL is one of the few businesses to operate an investment platform which deals directly with the customer. This not only enables it to build closer relationships, but extract higher margins aswell. For example, its operating margin presently stands at a lofty 62.50% — demonstrating the firm’s low-cost business model.

Structural drivers

Its strategy is built around increasing the amount of assets under administration; this is aided by two important structural drivers of growth. Firstly, we have ultra-low interest rates, courtesy of the bank of England. This provides a strong incentive for savers to move their savings into higher yielding investment vehicles, such as equity income funds which HL specialise in.

Secondly, the UK has very high rates of personal taxation and faces the prospect of even higher taxes to pay down the large fiscal deficit. This should underpin inflows into tax efficient vehicles, like ISAs and SIPPS. According to HMRC, HL in 2010/11 held a 6.9% market share for new subscriptions into the vantage stocks & shares ISA, an increase from 4.2% two years ago.

 Special Offer: Invest like Buffett, Slater and Greenblatt. Click here for details »

Beating analyst expectations

HL has a knack for consistently beating earnings expectations. In 2011, the company trounced analyst expectations and boosted pre-tax profits by 46%! In its latest trading update the firm increased assets under administration from £23.4bn at the end of 2011 to over £26bn by the end of March.

This is despite concerns over the FSA’s Retail Distribution Review (RDR), which comes into force at the beginning of next year. The FSA has proposed banning rebates from fund managers. Since HL derives a large portion of its income from rebates, it would have to recoup the lost revenue through direct charges to customers.

A significant portion of the company’s turnover stems from rebates paid by asset managers, so there have been concerns that a shift to direct fees will hurt margins and profitability.

However, I believe fears have been overdone; because HL consistently achieves high levels of customer loyalty and asset retention. For example, in 2011 HL’s vantage achieved an asset retention rate of 92%, up from 88% in 2008.

Ownership model

When researching potential companies, I look for how much equity the directors and staff own. A larger stake by the employees indicates that their interests are aligned with the shareholders; they therefore have a strong incentive to protect and grow the business. HL is a pertinent example of this, the directors and staff own over 60% of the equity in the business. And the co-founders Peter Hargreaves and Stephen Lansdown collectively own just over 50% of the company!

Management


Also, I am spending more of my time looking at the quality of the management. This is because competent and dedicated managers can set the business apart from its competitors, allowing the firm to discover new growth opportunities which don’t always show up in the share price.

This is why I have a particular fondness for co-founder and now executive director Peter Hargreaves. His dislike of ostentation; borrowing and love of criticism are traits I’d like to see in every CEO. Moreover, he is very cost conscious, checking every purchase invoice! I believe these qualities imbued into the company have helped it to deliver 30 years of profitable trading and generate record profits during the worst financial crisis in living memory.

Premium price

HL’s strong business model and robust financials are well reflected in the share price. At a current forecast P/E of 22.1, the company trades at a premium to its peers. However, the firm boasts a cash rich balance sheet, zero debt and a current forecast yield of 4.0%.

If the company can keep turning out cracking results, the shares will soon look cheap. But for the vigilant investor, this company is well worth adding to your radar to snap up at a more attractive valuation.


About the Author's Blog

Christopher OLeary Profile Image Promotional
The Astute Investor

Astute Investor is an investment blog devoted to providing clear investment ideas free of financial jargon in order to help private investors make wise long term decisions. I have been an active contrarian investor for over five years. The purpose for creating this blog was to dispel the myth perpetuated… ...read more or visit website »


Disclaimer:  

As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. The author may own shares in any companies discussed, all opinions are his/her own & are general/impersonal. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested.


Do you like this Post?
Yes
No
3 thumbs up
0 thumbs down
Share this post with friends



Hargreaves Lansdown PLC is a provider of investment management products and services to private investors in the United Kingdom. The Company's flagship service, Vantage, is a direct-to-private investor fund and wrap platform. Vantage offers clients the administrative convenience of being able to hold and manage their investments, including unit trusts, open ended investment company, equities, bonds, investment trusts and cash, irrespective of the tax vehicle, in one place with consolidated valuation reports. It operates in three segments: Vantage Division which is engaged in activities relating to the Vantage service, its direct to private investor platform; the Discretionary Division which focuses on the provision of managed services, such as portfolio management service and a range of multi-manager funds, and the Third Party/ Other Services Division which includes activities relating to the broking of third party investments and pensions, certificated share dealing among others. more »

Share Price (Full)
988.5p
Change
36.0  3.8%
P/E (fwd)
24.7
Yield (fwd)
3.7
Mkt Cap (£m)
4,518



  Is Hargreaves Lansdown fundamentally strong or weak? Find out More »


What's your view on this article? to Comment Now

 
 
You are feeling neutral

Use the £ sign in front of a ticker to turn £VOD into Vodafone PLC

You can track all @StockoChat comments via Twitter


About Christopher OLeary

Christopher OLeary

Follow

Financial blogger, market contributor and private investor. Author and creator of ‘The Astute Investor’, an investment blog designed to help investors preserve and accumulate wealth. This blog also voices my thoughts and ideas to help my development and progression as a private investor. Furthermore, I  contribute investment ideas and analysis through 'Seeking Alpha' and 'The Motley Fool',  global financial media sites. http://seekingalpha.com/author/christopher-o-leary http://www.fool.co.uk/news/investing/company-comment/2012/05/30/why-you-might-buy-pearson.aspx more »



Stock Picking Tutorial Centre



Stock Picking Simplified

Stockopedia takes your stock picking to the next level with cutting edge Stock Reports & Screening tools.


Get started
or Take a Tour to find out more.