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Time to sell the RDR rally?
by David Campbell on Oct 08, 2013 at 07:44
For a period that has seen the launch of the most far-reaching and disruptive regulatory shake-up of investment distribution ever, the past year has been a sweet spot for discretionary managers.
While the following wind of the broader financial recovery over three years has become more selective for the perceived winners of the new retail distribution review (RDR) regime, the gains this year have been remarkable.
‘The gap between winners and losers is widening,’ said Berenberg equity analyst Pras Jeyanandhan. ‘Those that best respond to changes in the industry are likely to see outsized inflows and earnings growth.’
Associated winners of the new distribution game have also been lavishly rewarded, with Hargreaves Lansdown up 67.3%. Fledgling challengers at the bottom end of the market cap scale have been most dramatically rerated of all, with Arbuthnot Group up 78.2% and Mattioli Woods 76.9%.
The rewards on offer for those with the magical combination of pricing power, clean balance sheets and strong and growing levels of recurring income seem to be exponential. But with current valuations leaving the sector winners at a chunky premium to peers on price to forward earnings, the market appears to have run quite far ahead of itself on earnings visibility.
Even the strongest companies also have a large component of market beta as we head into a period where equity indices are beginning to roll over. So is it time to call time on the retail distribution review (RDR) rally?
Citywire AAA-rated Anthony Cross of the Liontrust Smaller Companies fund says the valuation of his preferred play in the sector, Mattioli Woods, could currently be considered close to fair value. But he is confident the rewards on offer for it – and similarly disruptive businesses operating at a position of strength in a reconfigured market – were worth paying for.
‘I don’t like to get focused on the short-term valuation, but it has evidently very strongly rerated and there is certainly an argument that it is more fair value now than it was six months ago,’ said Cross. ‘But it is a business that is well placed to take advantage of the structural changes in the industry and has an opportunity to buy businesses.
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- Brewin Dolphin Holdings PLC
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- Hargreaves Lansdown PLC
- Arbuthnot Banking Group PLC
- Mattioli Woods PLC
- Brooks Macdonald Group PLC
- Rathbone Brothers PLC
- Ashcourt Rowan PLC
- Henderson Group PLC
- Investec PLC