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UK wealth stocks: further upside or value trap?

UK wealth stocks: further upside or value trap?

After a bumper year for the listed wealth management sector, can the stellar returns of 2013 be repeated?

Wealth management stocks have offered investors a way to play rising markets and changes to the workplace pension market.

As 2013 saw double-digit share price rises across the sector – with Mattioli Woods and St James’s Place (SJP) leading the way with 84% and 73% gains respectively – some say it now looks fully valued.

Leigh Himsworth, a UK equity manager at City Financial, is struggling to find any obvious valuation opportunities among listed wealth management stocks. ‘Within financials as a sector there are larger stocks that are starting to look attractive. Banks are back on the agenda, alongside life insurers,’ he said. In his view, this is taking interest away from smaller asset management and wealth stocks.

His sentiments are echoed by David McCann of Numis Securities, which currently has none of the listed wealth managers on buy ratings. He said: ‘Valuations have moved quite a long way ahead of earnings.’

The turnaround stories

Nonetheless, it is a sector that offers investors access to an array of growth and turnaround stories that could have even further to go in 2014. And while many industry chiefs have bemoaned higher regulatory costs, RBC analyst Peter Lenardos points out this has increased barriers to entry, which means the incumbents should do well this year.

Brewin Dolphin is a prime example of a turnaround story. The management’s moves to make the business more efficient and target an operating margin of 25% by 2016 was welcomed by the market, with a 58% share price rise over the year. Brewin Dolphin also recently moved to trade at a premium to its typically higher valued peer Rathbones for the first time in years.

Although costs associated with redundancy, the FSCS levy and onerous contracts provision weighed on full-year profits, many are tipping even more upheaval this year as management puts its new plan into action. ‘This year they really need to start delivering a large part of their plans. It will be a big test for them,’ McCann said.

In a trading update on Wednesday, Brewin said a £4 million hit to 'non-core income' in the fourth quarter of 2013 had come about as a result of a company-wide switch out of trail-paying units. Meanwhile strength in its discretionary business, which experienced an inflow of £0.3 billion in the quarter, combined with advisory and execution-only services, powered a 15% increase in core income to £63.8 million.This meant income was ultimately 6.5% higher at £69.6 million, while assets rose by £1.1 billion to £36 billion.

Citywire AAA-rated Alex Wright at Fidelity believes Brewin, a holding across his funds, has further to go in 2014 and that the good news is not fully priced in.

‘The significant changes in the wealth management industry should create a tailwind for companies with scale and a strong brand, such as Brewin Dolphin. Additionally, there is a significant cost-cutting programme under way at the company, which should see it moving more towards the margins of peers, having earned a lower margin for many years.

‘The shares had a good 2013 but I don’t think the market has yet fully priced in how much more efficient the Brewin Dolphin business model could be. There is more to go for in 2014, and the company remains a key holding for Special Values and the Smaller Companies fund,’ Wright said.

Asked if Brewin Dolphin’s turnaround will continue into 2014, Lenardos said it is a ‘resounding yes’ in his view. He highlights the company’s strong brand, footprint, potential for organic growth and favourable market conditions.

‘Brewin Dolphin has a relatively new management team with a credible plan. [Their] ability to deliver against that plan should continue to drive the share price,’ he said.

Despite Himsworth’s concerns about valuations in the sector, he continues to back Ashcourt Rowan, another business undergoing substantial change under chief executive Jonathan Polin. He says it ‘is still on an attractive valuation versus the rest’

Himsworth supports the firm’s recent acquisition of UK Wealth Management. He expects Ashcourt Rowan could positively surprise this year, alongside Mattioli Woods.

‘It has a great management team anyway and Atkinson Bolton (AB) was a fantastic acquisition for them. I think the AB guys are switched on. It is a good business and there is great strength and depth there. Mattioli Woods is a good quality business and there is a reason why the market may start to look at it differently,’ he explained.

If direct-to-consumer platform Charles Stanley Direct gains traction this year, Himsworth also believes Charles Stanley could surprise on the upside. ‘It could be significant for Charles Stanley and it could transform the fortunes for the company.’

McCann’s top pick for 2014 is SJP. Although its share price has had a strong run, he believes shareholders could expect a 10% capital return and 3-4% dividend yield this year.

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