Investment View: When it comes to fund managers, deal size matters
Asset managers are people businesses reliant on the money managers they employ
James Moore is the Independent's Associate Business Editor and writes the Outlook City comment column from Tuesday to Friday. He also has a keen interest in disability issues and when not attempting to further injure himself playing wheelchair basketball.
Tuesday 08 January 2013
Getting excited about the markets again? When the likes of Goldman Sachs' guru Jim O'Neill starts talking up equities it pays to keep at least one ear open. And that's what he has been doing, arguing that big investors are poised to desert government bonds and their pitiful yields for the stock market. That could fuel a sustained rally.
You actually don't need to worry too much about the UK economy – the FTSE 100 is dominated by multinational companies that make lots of their money abroad. However, America's and the eurozone's economic problems could yet knock his thesis off course.
Which brings us to fund managers. Shares in the sector's constituents have done rather well over the last year or so, but if Mr O'Neill is right, their good performance ought to continue.
Asset managers are people businesses, highly reliant on the skills and reputations of the money managers they employ, so they have to be approached with some caution.
As a rule, if you're considering the sector, it would pay to be invested in stable, dependable firms with solid cultures that are unlikely to be tempted by big-ticket deals. These can be very disruptive to this sort of business. Smaller deals, by contrast, are OK.
I last ran the slide rule over this sector on 23 January (published on 24 January) and I said Aberdeen Asset Management was one to hold for the long term. The phoenix-like company (it nearly burnt up during the split capital investment trust scandal) is in the FTSE 100 and has rewarded holders, surging up above 370p from 238p. It has outperformed most rivals since my last look.
The company trades on 15 times forecast earnings for the year ending 30 September, with a solid prospective yield of 3.5 per cent. It's looking pricey. Nonetheless, long term, I would be a holder of this stock, and I think the company will repay those who stick with it. So hold.
Jupiter is a slightly different beast, being much more weighted toward retail fund management. It hasn't had quite the run Aberdeen has enjoyed, standing at 220.9p when I last looked, although with the shares breaking through the 300p barrier it hasn't done badly.
The shares trade on a multiple of 15.6 times this year's earnings, with a forecast yield of 2.6 per cent. Again, this is a business that where I would be a long-term holder, and although it has a different profile to Aberdeen, the reasons are largely similar: Jupiter is well managed. It appears to be stable, and it boasts some good fund managers.
Henderson I tagged as one to avoid, although it has traded more or less in line with Jupiter since then. The group's most recent financial statements showed assets under management rising, but the company continuing to suffer a net outflow of money. In other words, clients are withdrawing their cash, but what's left went up because the markets rose.
At 12 times forecast earnings Henderson is cheap, although that's largely because it has a lot to prove. There's a decent forecast yield of 5.6 per cent. I'm beginning to think it might just be worth rolling the dice on this one, although I'd only make it a speculative buy. Tread carefully.
I'd be more wary of F&C Asset Management. I've always liked the fact that the company has spoken out on corporate governance and used its votes where they count. But I'm not a fan of the fact that it doesn't obey best practice in the way it is run. Edward Bramson, the activist investor who seized control a couple of years back, recently stepped down as chief executive, but he's still chairman. And a chairman ought to be independent so they can represent the interests of all investors.
Mr Bramson has had an impact on a share price that was struggling before his arrival, and of the big UK fund managers, only Aberdeen betters F&C's performance over the last year. However, he's also managed to kick some good people out of the door. At 11 times forecast earnings for 2013, with a forecast yield of 3 per cent, the shares are not all that expensive. But I'd still steer clear.
The blue-blooded Schroders satisfies my desire for stable companies. It's just very pricey at 16 times forecast earnings, yielding a shade over 2 per cent. The same goes for Rathbone Brothers, which targets wealthy investors who are willing to hand their money over to the firm's discretionary managers and leave it with them for a sizeable fee. The formula works well but the shares, on 15.5 times this year's forecast earnings, have been on a very good run recently, although the 3.7 per cent forecast yield is OK.
Ashmore, with its focus on emerging markets, deserves a premium, and at 16 times forecast earnings for the year to 30 June it has one. However, it offers a 4 per cent yield and exposure to parts of the world that are still growing. The shares aren't much above the 355p at which I said buy last year, and the company had a bit of a bumpy ride last year. It can bounce back. Buy.
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