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UK wealth stocks: further upside or value trap?

by Danielle Levy on Jan 29, 2014 at 13:42

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.

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