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Clash of the listed wealth titans: fund managers’ top picks for 2013

Clash of the listed wealth titans: fund managers’ top picks for 2013

Listed wealth management companies offer investors the opportunity to benefit from rising markets and tap into the pension market’s shift towards increasing retail investment.

However, with markets up from summer lows and the listed UK wealth and asset management sectors trading on an average of 16 times one-year forward earnings, up from a long-term average of 14 times, according to Numis, some argue the sector is starting to look fully valued.

If this is the case, earnings upgrades will be necessary to drive share prices higher and stock selection is likely to prove even more important.

Backing the Brewin turnaround

Brewin Dolphin is one stock that has offered investors the prospect of participating in a turnaround story, with management two years into a business review that aims to achieve an operating margin of 20% by 2015.

Now on an operating margin of 16.4%, investors are divided over whether the stock can overcome a number of headwinds. These include the planned departure of chief executive Jamie Matheson (pictured), who is to be replaced by David Nicol who joined the company a year ago from Morgan Stanley, alongside the hit from the removal of trail commission post-retail distribution review.

Numis anticipates there could be scope for disappointment over the short term and has the stock on a reduce rating as a result. ‘There appears to be more pressure on the revenue yield than many anticipate (trail income being lost faster than repricing is replacing it with fees due to implementation delays and no major pick-up in commissions, despite better retail investor sentiment) and project delays (so additional costs),’ the company noted.

Nonetheless, Numis expects wider operating margins improvements to be delivered and said board changes could help. However, it highlights ‘significant execution risk’ and describes a short-term turnaround as unlikely.

Citywire AAA-rated Alex Wright at Fidelity does not share this scepticism. He holds Brewin as a 4% position in the Fidelity Special Values trust, and had the stock as a top 10 position in his Fidelity UK Smaller Companies fund at the end of February.

He argues the multi-year turnaround story remains intact and he expects a continuation of the same strategy under the new CEO. Wright still has conviction that over time Brewin’s margins will end up closer to the peer group average, if not higher, and he does not hold any other wealth managers.

His sentiments are echoed by AAA-rated Martin Cholwill, who holds Brewin in the Royal London UK Equity Income fund, and expects the margin gap between Brewin and its competitors can continue to narrow.

‘There has been a transitional management, so there is an orderly handover. I don’t think there is anything to worry about with the management change,’ he said, highlighting no change to their trading outlook or earnings forecast.

The manager does not own Rathbones and although he notes the company has achieved ‘best in class profit margins’, he does not see value in entering the stock at its current share price.

Brooks Macdonald vs Ashcourt Rowan

Lower down the capitalisation scale, investors are faced with the conundrum of whether to invest in potential turnaround stock versus the more expensive but consistent growth stock Brooks Macdonald.

Leigh Himsworth, manager of the CF Eden UK Select Opportunities fund, opted to sell out of Brooks Macdonald in favour of Ashcourt Rowan back in December, arguing the stock had become too expensive, even though he is very positive on the management team there.

‘I don’t have a problem with the company at all, but they looked too fully valued for my liking. I was looking around at the end of last year for an alternative. I came onto Ashcourt Rowan because I was aware of what Jonathan Polin had done there. He is a very focused individual, which is what is needed in the sector as people can be guilty in the sector of gauging too much opinion,’ he said.

He says the valuation ignores the fact that even modest growth in the markets could provide a significant boost to its £3.8 billion in assets.

The manager is also positive on St James's Place, but views the stock as fully priced and is waiting for a sell-off to buy back into it.

Threadneedle UK manager Simon Brazier, in contrast, is not put off by SJP’s valuation and used the recent Lloyds placing to top up his position in the stock. He expects the company to grow its client base by picking up lower and mid-tier clients who may lose access to advice as other firms withdraw from the space due to the RDR, and anticipates the stock can also benefit from rising equity markets.

The listed wealth managers in numbers:

Rathbones

Average AUM: £16.9 billion

Operating profit margin: 30%

One-year forward P/E: 15.5

Brewin Dolphin

Average AUM: £30.1 billion

Operating profit margin: 16.4%

One-year forward P/E: 12.3

Brooks Macdonald

Average AUM: £3.2 billion

Operating profit margin: 18%

One-year forward P/E: 15.2

(Source: Numis)

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