Rise of the Asset Managers?

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13th Dec '17 by iwright7

21 comments 8529 reads

I have a variety of customised Quality screens, some of which are tougher to pass than others. What has surprised me is the number of Asset management companies that are passing the toughest of screens and the extent of their 1Y gains.

I have selected 3 (which I now hold) and am thinking that the Asset managers themselves have become a better investment prospect than many of the multi-£Ms of funds they operate.

	Polar POLR	Jupiter JUP	Premier PAM
1Y RS	31%	46%	56%
PER	16.1	14.6	13.1
Operating Margin %	42	27	25
ROCE	30	33	25
ROE	25	28	43
F-Score	9	8	7
StockRank	94	82	94

Alternative views welcome? Ian

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Iwright7

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21 comments

iwright7

14th Dec '17

Intriguing to see that the Impax funds are following “sustainable” investment strategies and its quality return numbers are in line with the other Asset managers above. A spectacular tripling in the share price over in the last year has pushed the PE up to 21x, so a lot must be expected. Interesting choice Vegpatch.

Another case of the management holding company out preforming its funds.

VegPatch

14th Dec '17

Luckily That was not true when I bought it.
It was trading at a discount to others on a EV/AUM basis @ c2% AUM, yet was growing faster.

I also wouldn't believe the numbers on Stockopedia for the forward earnings which show FLAT EPS FY18 vs FY 17 because:
1. At the full year results this comment was made
"Operating earnings, excluding the non-recurring NIC charge, more than doubled to 9.3 million (2016: 4.2 million), giving an operating margin of 29%. Run rate operating earnings were 11.6 million at the end of the Period, equivalent to a run rate operating margin of31%"
The FY18 run rate operating earnings are up 25% and AUM has contined to grow, so why the EPS is flat is strange to me.

2. Impax has announced it will be acquiring PAX asset management (will make the rebranding pretty easy!) and this deal is only expected to close in March next year so there is not a full years contribution from PAX. However management said at the time of the deal
"The Acquisition is expected to enhance Impax's earnings per share significantly in the first full financial year after completion (excluding exceptional items arising from transition and transaction costs, and the impact of goodwill amortisation)."

So I think the forecasts are likely to prove conservative. But it is more highly rated than when I bought it.

However your rerating point is well made and means I need to watch it carefully.

iwright7

14th Dec '17

Vegpatch - Yes very interesting - I may be tempted in spite of the high PE.

One other more general point with these type of Asset management companies (and I am not wishing to suggest insider dealing), but if anyone is in a position to know ahead of us the incoming funds/future profitability, its the investment managers within that company. Therefore may be strategically best to follow an upward share price trend and follow the money, irrespective of broker noise! Ian

Brigra

14th Dec '17

iwright - There was an article in the FT a couple of weeks ago arguing your point that fund/etf managers can be a better investment than the funds they manage.

It primarily looks at large US managers, but does identify that a rerating has taken place for many, and that they are now valued on growth metrics rather than more staid historical p/e measures.

https://www.ft.com/content/257db804-d9d3-11e7-a039-c64b1c09b482
or If you don't subscribe to FT, you can read by googling;
"ETF providers better bet than products they sell"

iwright7

14th Dec '17

Briga - Many thanks - Excellent article and I thought that I couldn't be just me to pick up on this.

The most salient points are these:

....Daniel Loeb, the American hedge fund manager, put forward the argument earlier this year that BlackRock was a “misunderstood franchise” that was being “valued like a traditional asset manager” when in fact these ETF players are actually “oligopoly businesses with faster growth and much higher incremental margins than traditional asset management — and thus deserve much higher P/E multiples over time”. ....It may be more profitable to buy an ETF manager instead.

I couldn't agree more and its clear that these type of businesses are developing all the hallmarks of Buffet type investment franchises.

jonesj

14th Dec '17

1 ETFs usually have a much smaller declared fee. (I say smaller declared fee, since it's often difficult to confirm if some if the more obscure indices tracked by them are total return indices & verify that the dividends are in the return. So I remain suspicious)

If the ETFs take a bigger market share, it follows the conventional fund managers should lose market share, on average.

2 There must be a cyclical element, since demand for stock market funds is high in the late stages of a bull market. I'm not sure it's the right time to buy them now.

3 Jupiter have at least one star manager in Alistar Darwall, with a good long term return (disclosure: I have done nicely with JEO). Whilst such people are performing, their open ended funds will attract more money.

djpreston

14th Dec '17

On the whole I have to agree with the premise that the fund management groups are generally better investments than their funds and its a trend I have often played over the past 30 years, starting with good old M&G (before the Pru bought it back in 99).

One thing I like is that the management often own very large stakes in comparison to other Plcs and as such they are more focussed on shareholder returns. We can see this with JUP and their policy of returning cash to shareholders via special divis.

The problem is when a fund management group has a real bias towards one asset class or geography - say Fixed Income without much of an offering in equities or heavily dependent on a franchise in say EM. As these sectors or themes come into or fall out of fashion, you see big swings in FUM and therefore fees. Of course, this can also offer longer term contrarians an opportunity to buy at better prices say EM when there have been big outflows for a number of years (as happened recently) and those with giant Fixed Income funds may be very vulnerable if the bond bubble finally breaks - ditto those who have been beneficiaries of the multi asset/alternatives boom as investors desperately seek an alternative to Fixed Income or "lower risk" investment.

The other big risk, of course, is the star fund manager who decides to walk away with his multi billion pound fund....

There have been exceptions to the buy Asset Management Groups story though (New Star springs to mind). That was a classic case that looked good on paper - get together a stable of "Star" managers and watch the money flood in..... all ended very messily and is an interesting story to examine.

With the continued pressure on management fees and the ever rising tide of regulation and compliance (MIFID2 etc) the costs of AM is rising sharply.

It is ever harder to launch a new Asset Management group - not only has the cost/income ratio changed but there are other real issues that any group faces.

The industry is now controlled by the gatekeepers that VegPatch referred to above - the likes of the Hargreaves Landsdown and the ever consolidating Discretionary Managers like Rathbones and their kind (I have to disclose my own position as head of equity research for a listed Wealth Manager here). The big groups will not consider a fund generally (yes there are exceptions) until it has a three year track record and is above a certain size (they cannot invest say £50m into a fund that is only £10, £20, £50m in size). This means that any fund has to either be seeded by the AM company or have the backing of very patient or far sighted Wealth Managers/DFMs (and we have often backed funds that would have been ignored by others). The exceptions I refer to are generally where a new fund is being set up by a proven manager or team. Interestingly though the smaller funds can often be much better performers and when they get much bigger they often see that performance fall off.

Sorry for the ramble and I cant really be more specific as you will hopefully appreciate.

iwright7

14th Dec '17

On the negative side low cost ETFs will gain a stronger foothold and Fund managers are having respond to with lower % fees and/or out-performance bonuses.

The upside is Operational gearing from £Millions of extra AUM - Where are the extra costs in servicing each extra £100M, or so?

The other thing in the funds favour is that financial advisers get an easy ride - Advisors don't need to know anything about individual companies, nor risk the wrath of an investor when some of their share recommendations go bad. The advisors even don't need to know much about the funds they are recommending and cover themselves by trendy top down recommendations. Clients trust the big fund brand names and on it goes. All very nice.

So the Asset management sector prospers and even more money pours in, until market conditions change. As a result I will be watching their price momentum like a hawk. Ian

gsbmba99

14th Dec '17

I own Premier Asset Management (LON:PAM) and Liontrust Asset Management (LON:LIO). I love PAM's quarterly dividend, 70% payout ratio and rapid EPS growth. It should be paying me about 10.5% dividend on invested capital for FY19 if all goes to plan.

One of the nice things about both of them being "retail" oriented (PAM more than LIO) is that they have monthly fund fact sheets in addition to quarterly AuM updates that you can use as a rule of thumb for financial health. I've been adding up the AuM from the fund fact sheets to see how the companies have been doing.

Since May, AuM at PAM increased in 13/23 funds in June, 19/24 in July, 17/23 in Aug, 16/23 in Sep and 22/23 in Oct. Thus, they don't appear overly reliant on any one fund (or fund manager) increasing AuM. The monthly AuM performance is despite the fact that many of the funds pay dividends very regularly (sometimes monthly). The PAM distribution platform seems quite powerful. It's almost exclusively via IFAs. They're attracting >£500m in each of the last 4 quarters though quite large redemptions mean the net figure is considerably lower. They do seem to have a bit of a niche in multi-asset and "income" more generally. I think the prospectus said that "income" was the top retail category in 7 of the last 10 years.

I was attracted to LIO because Reade Griffith (Polygon) owns a significant part (or has economic exposure to it). They've been diversifying away from a prior overreliance on their Special Situations fund. They completed on the Alliance Trust sustainables business (c. £2.5bn AuM) in April and have hired a fixed income manager and strategist from Kames to start in January. Judging from the Kames funds that appointed a new manager the day before Liontrust announced their appointments, the fund manager used to co-manage Kames Strategic Global Bond ($638 AuM according to Trustnet), Kames Strategic Bond (£320m), Kames High Yield Bond (£908m) and Kames Sterling Corporate Bond (£604m). I'm hoping he has a loyal following.

Also, Legal & General (LON:LGEN) is, from memory, the number 4 passive manager globally and number 1 in UK DC and DB.

lemonjar

14th Dec '17

Stocko's compare stocks tool works quite nicely on these i think, e.g.

https://www.stockopedia.com/compare/?tickers=LON%3APOLR%2C+LON%3AJUP%2C+LON%3APAM%2C+LON%3ALIO%2C+LON%3AIPX%2C+LON%3AMGR%2C+

Impax Asset Management (LON:IPX) seems to have most wind in their sales with the highest momentum rank and conversely lowest value rank. Yet its EPS growth is lowest...? One for more experienced analysts than me, curious if there are any particularly telling metrics in that comparison, good or bad?

( long in Liontrust Asset Management (LON:LIO) )

gsbmba99

14th Dec '17

I'm not convinced the US trend toward passives will materialise to the same extent in the UK. A very significant driver of the popularity of index investing is the US tax system. The US has an unusual system where the individual fund shareholder has to pay tax on the underlying net realized gains in the fund portfolio. They also have a short-term (held <1yr) capital gains tax rate significantly higher than the long-term rate. In pretty much every other country on earth, tax is paid when you sell the fund shares not when the fund realises a gain. Since the portfolio of an index linked ETF or index fund doesn't have much portfolio turnover, they don't have realized gains to distribute and they are way more tax efficient.

iwright7

15th Dec '17

Good point about the difference in the Tax system boosting US ETF sales. I see that there are already some 2000 US ETFs, in a myriad of investment flavours. I particularly like the Robotics/AI ETFs and have recently taken a opening position in a AI driven ETF myself - More background on this type of new "active" ETF from Blackrock here:

https://www.bloomberg.com/news/articles/2017-11-20/blackrock-king-of-indexing-ditches-passive-for-bot-built-etfs

The thrust of the FT article is that Blackrock has developed a franchise and is being re-rated accordingly. Looking at the spectacular Op Margin/ROCE/ROE numbers (table above) it does appear that a franchise/re-rating is developing in some of the UK asset management companies to.

iwright7

29th Dec '17

As we come to the end of the year its pleasing to see continued momentum in the 3 selected Asset Managers. In the 3 weeks since purchase they have averaged a gain of almost 10%.

Its an odd situation where these holding companies have higher % gains than the multitude of funds they manage - Long may it last! Ian

VegPatch

9th Jan '18

Great inflow numbers today from Impax Asset Management (LON:IPX), Group AUM over Q4 rose to £8.2bn +13%, but most importantly inflows into the listed funds rose £672m, or 9% (36% annualised) over the quarter. Investing in asset managers is all about inflows. I hope Impax will push on today.

iwright7

9th Jan '18

VP - Yes Impax Asset Management (LON:IPX) is an excellent result and having looked at them more closely after your earlier post I took an initial position and may be tempted to buy some more. Strengthens my view that for many reasons, "the trend is your friend".

VegPatch

11th Jan '18

Have taken some profits today in IPX. Shares up over 7%, market at recent highs, not many clouds on the horizon
Locking in some of the gain (>100%)

iwright7

11th Jan '18

VP,

Impax Asset Management (LON:IPX) are turning into another Games Workshop (LON:GAW) with very impressive return numbers. Many thanks for the heads up on this one - I owe you a pint+.

Jupiter Fund Management (LON:JUP) are struggling because of modest Q4 AUM gains announced this week, but Premier Asset Management (LON:PAM) also doing well. Ian

VegPatch

11th Jan '18

No problems Ian, I never make recommendations but I do highlight companies that interest me personally and try and explain my reasoning. I am glad you have done well. If you are going to David Stredder's Mello conference in Derby I might just take you up on that kind offer

roddy10

11th Jan '18

DJPreston's message was rather close to home - I have an involvement at a start up / early stage fund manager and the issue is precisely as you describe but even tougher - investors demand discounted fees and fee capping; though the regulatory burden (legal and compliance) and now MIFID 2 increase costs.

It is ironic that the FCA has long complained about high margins in fund management and that it is not competitive and yet has increased the barriers with MIFID 2 and so made it harder for new entrants.

Just in case anyone is thinking I am moaning for no reason here are some 'back of an envelope' points:
1. To start a fund management co from scratch and be institutional grade I reckon you need at least:
a. One fund manager
b. One analyst
c. One back office
d. Risk manager
e. COO
(We are early stage but are fortunate to have many more people).

2. You will need to have a transportable track record or spend two years building a track record before getting ANY outside money (which is what I have done as my old track was too long ago / different product etc)

3. Need to offer discounted fees and a TER cap to the early stage / founder investors

4. So put that altogether and you will find that on the first $50M you raise you might get 0.5% fees and limited (if any performance) but will have a TER cap - so actually you are subsidising the investors - you have to effectively pay in yourself probably 25 - 50 bps to cover the TER cap and your RPA (research budget) etc etc

5. Only IF and when you get to $100M (and probably nearer $200M) and have managed to increase your average fees might you even start getting close to break even on a cashflow basis and then you have your accumulated costs to pay back. Remember all the mouths we mentioned earlier - they all need to be fed.

6. Oh and did I mention platform fees; distribution fees etc......that breakeven point is moving up even more. And if you have European clients because you are a UCITS fund in 24 months time you have no idea if you are going to have to redomicile your entire team.

7. You probably think this might mean you will have to live on a lower salary than otherwise for a year or more - but actually it could be 5 years - so you will have to live on your savings....except there is a problem ---- investors will want you to have significant skin in the game so your life savings have to be invested in the fund.....remember the fund manager only gets paid after everyone else has been paid....

And sorry I can't be more specific :-)

iwright7

12th Jan '18

VP,

Coincidentally or not, of the various Asset managers Impax Asset Management (LON:IPX) and Premier Asset Management (LON:PAM) have the lowest PEG and the highest recent RS%. Appears to be a re-rating race going on.

Yes I will be there at Mello in Derby and will be happy to buy lunch. Let's tick tack nearer the date. Ian

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Rise of the Asset Managers?

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Iwright7

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