The march of hedge funds up the shareholder registers of listed wealth managers has been relentless; the only impediment seems to be a lack of sellers.
Having taken his first bite out of Walker Crips in August, JO Hambro Capital Management co-founder Christopher Mills (pictured) now owns 9.5% of the firm through his Oryx fund. It is a stake worth £1.6 million after several top-up purchases.
Similarly, hedge fund veteran Christopher Gate initiated a position in WH Ireland last month.
He has since built it up and now controls 9.5% of the company – equivalent to almost £2 million – through his Oceanwood Capital Management.
Beyond the superficial coincidences – two Christophers, two 9.5% stakes, two funds beginning with O and two wealth managers beginning with W – what they have in common is value.
By style, the two investors seek out mispriced assets: Mills goes for strong business models’ suffering from ‘factors constraining their performance’ that he can address as an activist shareholder.
Meanwhile, Gate likes companies that are undergoing a fundamental change, such as a corporate deal or a management shake-up, the consequences of which yet to be appreciated by the market.
‘There’s no genius in this one,’ Mills told Wealth Manager. ‘The business is obviously worth something but you’re not paying anything for it at these prices.’
Walker Crips trades at just 1.6x earnings, despite a 3% yield. Its average price-to-earnings ratio over the past five years has been 16.3x. The company also boasts £10 million of cash on its balance sheet and a net asset value per share of 41.5p. The share price is currently at 45.25p.
‘At this price we would take the stake a lot further,’ Mills confirmed.
WH Ireland, meanwhile, has been quietly recovering from the shock departure last December of its chief executive Paul Compton.
Its share price collapsed by 28% in one day, and several other senior managers followed Compton out of the door amid an investigation into employees’ trading in the shares of other companies.
A subsequent court case has now been settled and WH Ireland is focusing on the integration of Seymour Pierce, the private client business it purchased from administrators in February. WH Ireland has tipped the positive impact of this deal to become apparent next year.
The activity from such investors comes alongside the revival of interest in wealth managers from private equity houses, with Permira snapping up Bestinvest and now gunning for Tilney.
‘We have seen a lot more interest in wealth management recently,’ says Catherine Tillotson, managing partner at the Scorpio Partnership.
What Bestinvest, WH Ireland and Walker Crips also share are stockbroking arms. The rationale for integrating this into wealth management is that the broker serves as the entry point for new clients, who can then be moved into higher value propositions.
The trouble has been that these brokerages have come under immense pressure from the likes of Hargreaves Lansdown. ‘Stockbroking is a model people are looking at and wondering which way it will fall,’ Tillotson said.
Yet she thinks the doom-mongers may be proved to be unduly pessimistic in their outlook for broking, with a little help from the regulator. ‘There was this concept of simplified advice, which I think is back on the agenda of the Financial Conduct Authority.’
If the regulator does emphatically give simplified advice its stamp of approval, the market could well rerate brokers.
Stuart Duncan, an analyst at Peel Hunt, links this to the advice gap opened by the retail distribution review. ‘Those individuals still need to do something with their money, so they still need advice.’
He agrees too that execution-only services can provide a first step for clients towards higher margin wealth management. ‘We very much buy into the life cycle idea of clients.’
Among larger companies, Duncan notes the vogue has been more around ‘financial planning’ rather than stockbroking.
So while their legacy as brokers may temporarily dampen their valuations, the smaller players like Walker Crips and WH Ireland are determined to emerge as fully fledged wealth managers.
David Gelber, chairman of Walker Crips, targets a ‘transformation of the company from a traditional private client stockbroker to a full service, increasingly fee-based, investment and wealth management group’.
WH Ireland is described as ‘one of the fastest growing wealth management companies’ by its chairman, Rupert Lowe, who highlighted that its wealth management revenues grew by 18% in the first half of the year compared with the equivalent period of 2012. In contrast, its broking revenues fell by 23%.