Record — AUME now over $70bn

Record (LSE: REC)

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Research: Financials

Record — AUME now over $70bn

Record’s assets under management (AUME) reached over $70bn for the first time at the end of December, reflecting a combination of net flows and market, foreign exchange and scaling moves in Q321. The pattern of flows has increased the diversity of revenues while the benefits of initiatives to increase the breadth of product offering are yet to come; the launch of the Currency Impact Fund is due soon and a pipeline of other potential products is in development, supported by technology investment.

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Financials

Record

AUME now over $70bn

Q321 trading update

Financial services

26 January 2021

Price

49.1p

Market cap

£98m

Net cash (£m) at end-September 2020 excluding seed fund cash

15.5

Shares in issue

199.1m

Free float

53%

Code

REC

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

2.2

26.2

24.9

Rel (local)

0.6

11.4

40.3

52-week high/low

49.1p

26.3p

Business description

Record is a specialist independent currency manager that provides a number of products and services, including passive and dynamic hedging, and a range of currency for return strategies, including funds and customised segregated accounts.

Next events

Q421 trading update

23 April 2021

FY21 results

17 June 2021

Analysts

Andrew Mitchell

+44 (0)20 3681 2500

Martyn King

+44 (0)20 3077 5745

Record is a research client of Edison Investment Research Limited

Record’s assets under management (AUME) reached over $70bn for the first time at the end of December, reflecting a combination of net flows and market, foreign exchange and scaling moves in Q321. The pattern of flows has increased the diversity of revenues while the benefits of initiatives to increase the breadth of product offering are yet to come; the launch of the Currency Impact Fund is due soon and a pipeline of other potential products is in development, supported by technology investment.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS**
(p)

P/E
(x)

Yield
(%)

03/19

25.0

8.0

3.25

2.30

15.1

4.7

03/20

25.6

7.7

3.26

2.30

15.1

4.7

03/21e

25.5

6.3

2.61

2.30

18.8

4.7

03/22e

30.1

10.4

4.29

2.30

11.4

4.7

Note: *EPS is diluted. **DPS excludes special dividends.

Q321 update

Record’s end-Q321 AUME stood at $74.6bn (£54.6bn), growth of 13% (7%) since end September. This reflected a $5.1bn AUME net inflow, an increase of $2.4bn from FX moves and scaling to match mandate volatility targets, and a $1.2bn uplift from market movements affecting underlying assets. Within the $5.1bn inflow, the largest movement was $4.7bn from the large dynamic hedging mandate announced in September (a balance of c $2.3bn is likely to be included over the next two quarters). On a like-for-like basis, the level of management fee rates remained broadly unchanged during the third quarter while, subject to other changes, the increase in higher fee margin dynamic hedging and multi-product AUME would increase the average fee margin for the group prospectively.

Outlook

The increase in AUME in Record’s third quarter confirms a rapid build-up in the large dynamic hedging mandate (c $7bn), which accounts for a large part of the 18% increase in revenue we estimate for FY22. Revenue in that year will also benefit from the Currency Impact Fund, with further upside potentially added by additional tactical mandates and other new products. Deployment of new software and technology services is making progress and will both enable new product offerings and deliver efficiency savings. Our revenue estimates are increased modestly (2% and 3% for FY21 and FY22) reflecting the increase in AUME, while operational gearing and the assumption of greater efficiency benefits results in EPS estimate increases of 8% and 17% for the two years respectively.

Valuation: P/E below peers on FY22 estimate

Record shares trade above and slightly below an asset manager peer group based on calendarised P/E and EV/EBITDA ratios for 2020, but for 2021, when its earnings benefit more fully from the large dynamic hedging mandate and cost efficiencies, they trade on a P/E of 12.7x versus the peer average of 15.9x.

Changes in AUME and investment performance

Exhibit 1 shows the progression in AUME since the end of FY20 with net flows, market and other changes for the third quarter and first nine months of FY21.

Looking at third-quarter net flows, we have already highlighted the $4.7bn arising from the large dynamic hedging mandate announced in September (a balance of c $2.3bn is likely to be included over the next two quarters). In addition, there was a $1.2bn inflow in the multi-product category comprising a $0.4bn short-term tactical mandate and $0.8bn from a tactical mandate that was previously not included in AUME, with income allocated to other investment services; this element of AUME will not therefore affect expected total revenue. Finally, there was a (relatively small) outflow of $0.8bn from passive hedging.

Markets, foreign exchange movements and scaling for mandates with a volatility target added $3.6bn in Q321 and $11.2bn in 9M21.

Exhibit 1: AUME progression Q420 to Q321

$bn

Year-end March

AUME

Net flows and other moves

Q420

Q121

Q221

Q321

Q321

9M21

Dynamic hedging

2.5

2.9

3.2

8.0

4.7

5.2

Passive hedging

50.3

53.9

55.6

57.9

(0.8)

(1.6)

Currency for return

2.6

3.1

3.4

3.6

0.0

0.0

Multi-product

3.0

3.2

3.5

4.9

1.2

1.2

Cash and futures

0.2

0.2

0.2

0.2

0.0

0.0

Total

58.6

63.3

65.9

74.6

5.1

4.8

Markets

1.2

5.3

FX and scaling for mandate volatility targeting

2.4

5.9

Total change

8.7

16.0

Source: Record

Performance in the currency for return strategies saw dynamic macro currency in negative territory (-2.68%) in the quarter (the strategy blends discretionary and systemic allocations and has a record of outperforming in weak markets). However, the multi-strategy composite was positive (+3.64% and +0.75% per year since inception). Currency for return mandates account for less than 8% of revenues.

Estimate changes

Headline figures from our revised estimates are shown in Exhibit 2. The modest revenue increases reflect the AUME movements described above, with the main changes compared with our previous expectation being a somewhat faster build up in the large dynamic hedging mandate together with the market-related changes. We have conservatively assumed the $0.4bn short-term tactical mandate is only in place for one quarter and, as usual, our estimates do not include any assumed performance fees so any that are crystallised would represent upside from our estimates.

The greater diversity of revenues referred to earlier is evident within our forecast for FY22. The proportion of management fees accounted for by passive hedging is an estimated 39% compared with 52% for FY20. Dynamic hedging contributes 27% in FY22e versus 17% in FY20.

We have assumed somewhat greater efficiency benefits from investment in technology in FY22 and, together with operational gearing in both years, this results in increases of 8% and 17% in pre-tax profit and earnings per share for FY21 and FY22 respectively.

Exhibit 2: Estimate changes

 

Revenue (£m)

PBT (£m)

EPS (p)

DPS (p)*

 

Old

New

Change

Old

New

Change

Old

New

Change

Old

New

Change

03/21e

24.8

25.5

3%

5.8

6.3

8%

2.42

2.61

8%

2.30

2.30

0%

03/22e

29.5

30.1

2%

8.9

10.4

17%

3.67

4.29

17%

2.30

2.30

0%

Source: Edison Investment Research. Note: *Dividend excludes any special payment.

Valuation

An updated version of our comparative valuation table, which puts Record in the context of a group of UK asset managers, is shown in Exhibit 3. Record is differentiated by its role as a specialist currency manager but its fees are primarily based on the size of AUME so, like the asset managers, it is exposed to movements in underlying equity and fixed-income markets and flows.

Our table shows calendarised figures for 2020 and 2021 P/E and 2020 EV/EBITDA. Record shares trade above and in line with the average 2020 P/E and EV/EBITDA multiples respectively. Record’s earnings and EBITDA for calendar year 2020 benefit from a quarter of the performance fee earned in FY20 although, more significantly, the three-quarters contribution from FY21 only includes a partial benefit from the new dynamic hedging mandate. For calendar year 2021 the P/E on our estimate is 12.7x compared with a peer average of 15.9x. The dividend yield of 4.7% is above the peer average and there is the potential for this to be enhanced with a special dividend in due course (on our estimate the FY22 yield would be 6.1%). The board’s dividend policy is that the dividend should be at least covered by earnings, after allowing for anticipated increases in costs and regulatory capital requirements.

Exhibit 3: Comparing valuation with UK fund managers

Price

(p)

Market cap

(£m)

P/E 2020e

(x)

P/E 2021e

(x)

EV/EBITDA 2020e (x)

Dividend yield (%)

Ashmore

443

3,160

17.5

16.2

11.7

3.8

City of London Investment Group

478

242

9.8

N/A

N/A

6.3

Impax Asset Management

852

1,112

41.3

34.6

30.7

1.0

Jupiter

294

1,625

12.2

11.4

6.8

5.8

Liontrust

1,280

781

14.1

11.8

9.2

2.6

Man Group

152

3,025

11.9

10.2

8.3

5.1

Polar Capital

666

658

11.3

10.8

7.9

5.0

Schroders

3,460

9,149

17.1

16.3

11.7

3.3

Average

16.9

15.9

12.3

4.1

Record

49.1

97

17.7

12.7

12.3

4.7

Source: Refinitiv, Edison Investment Research. Note: P/E and EV/EBITDA on a calendar-year basis. Record’s dividend yield excludes the special dividend. Priced at 25 January 2021.

Exhibit 4: Financial summary

£'000s

 

 

2018

2019

2020

2021e

2022e

March

 

 

PROFIT & LOSS

 

 

 

 

 

 

 

Revenue

 

 

23,834

24,973

25,563

25,545

30,071

Operating expenses

 

 

(16,735)

(17,089)

(17,996)

(19,265)

(19,715)

Other income/(expense)

 

 

173

(8)

82

(36)

0

Operating Profit (before amort. and except.)

 

 

7,272

7,876

7,649

6,244

10,356

Finance income

 

 

56

113

88

40

42

Profit Before Tax

 

 

7,328

7,989

7,737

6,284

10,398

Taxation

(1,182)

(1,559)

(1,365)

(1,194)

(1,976)

Minority interests

 

 

0

0

48

60

30

Attributable profit

 

 

6,146

6,430

6,420

5,150

8,453

 

 

 

 

 

 

 

 

Revenue/AuME (excl. perf fees) bps

 

 

5.1

4.9

4.9

4.8

5.2

Operating margin (%)

 

 

30.5

31.5

29.9

24.4

34.4

 

 

 

 

 

 

 

 

Average Number of Shares Outstanding (m)

 

 

206.5

198.1

197.1

197.1

197.1

Basic EPS (p)

 

 

3.03

3.27

3.26

2.62

4.30

EPS - diluted (p)

 

 

2.98

3.25

3.26

2.61

4.29

Dividend per share (p)

 

 

2.30

2.30

2.30

2.30

2.30

Special dividend per share (p)

 

 

0.50

0.69

0.41

0.00

0.70

Total dividend (p)

 

 

2.80

2.99

2.71

2.30

3.00

 

 

 

 

 

 

 

 

BALANCE SHEET

 

 

 

 

 

 

 

Non-current assets

 

 

2,339

2,161

4,868

4,492

3,827

Intangible Assets

 

 

228

288

470

455

440

Tangible Assets

 

 

910

761

751

601

451

Investments

 

 

1,115

1,112

2,472

2,759

2,759

Other

 

 

86

0

1,175

677

177

Current Assets

 

 

29,737

31,427

31,149

27,891

32,168

Debtors

 

 

6,775

7,562

8,704

8,425

9,229

Cash

 

 

12,498

12,966

14,294

6,818

10,291

Money market instruments

 

 

10,198

10,735

7,958

12,491

12,491

Other

 

 

266

164

193

158

158

Current liabilities

 

 

(5,525)

(6,158)

(6,955)

(5,514)

(5,282)

Creditors

 

 

(2,630)

(2,736)

(3,009)

(2,804)

(3,072)

Financial liabilities

 

 

(2,467)

(2,621)

(2,191)

(1,800)

(1,800)

Other

 

 

(428)

(801)

(1,755)

(910)

(410)

Non-current liabilities

 

 

0

(29)

(901)

(353)

(353)

 

 

 

 

 

 

 

 

Net Assets

 

 

26,551

27,401

28,161

26,516

30,360

Minority interests

 

 

0

60

132

72

42

Net assets attributable to ordinary shareholders

 

26,551

27,341

28,029

26,444

30,318

 

 

 

 

 

 

 

 

No of shares at year end

 

 

199.1

199.1

199.1

199.1

199.1

NAV per share p

 

 

13.3

13.7

14.1

13.3

15.2

 

 

 

 

 

 

 

 

CASH FLOW

 

 

 

 

 

 

 

Operating Cash Flow

 

 

2,746

7,026

6,543

5,283

8,799

Capex

 

 

(236)

(72)

(243)

(140)

(140)

Cash flow from other investing activities

 

 

7,899

(561)

1,513

(5,381)

(108)

Dividends

 

 

(6,810)

(5,517)

(5,888)

(5,357)

(4,578)

Other financing activities

 

 

(10,367)

(613)

(943)

(2,026)

(500)

Other

 

 

146

205

346

145

0

Net Cash Flow

 

 

(6,622)

468

1,328

(7,476)

3,473

Opening cash/(net debt)

 

 

19,120

12,498

12,966

14,294

6,818

Closing net (debt)/cash

 

 

12,498

12,966

14,294

6,818

10,291

Closing net debt/(cash) inc money market instruments

22,696

23,701

22,252

19,309

22,782

 

 

 

 

 

 

 

 

AUME

 

 

 

 

 

 

 

Opening ($'bn)

 

 

58.2

62.2

57.3

58.6

76.3

Net new money flows

 

 

(1.2)

(4.5)

4.6

6.5

0.6

Market/other

 

 

5.2

(0.4)

(3.3)

11.3

0.4

Closing ($'bn)

 

 

62.2

57.3

58.6

76.3

77.3

Source: Record accounts, Edison Investment Research


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This report has been commissioned by Record and prepared and issued by Edison, in consideration of a fee payable by Record. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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This report has been commissioned by Record and prepared and issued by Edison, in consideration of a fee payable by Record. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

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The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

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Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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Research: Investment Companies

Finsbury Growth & Income Trust — ‘Perfectly rational to do nothing if you are unsure’

Finsbury Growth & Income Trust (FGT) is celebrating its 20th anniversary under the management of Nick Train. While underperforming in recent months, the trust is ahead of the broad UK market over the last one, three, five and 10 years. Stock market volatility in 2020 afforded the manager an opportunity to add another new name to the fund, credit bureau Experian, which he considers a rare example of a globally significant UK company that is benefiting from the optimisation of its vast database. Train is sticking to his tried-and-tested process that incorporates three rules of thumb: ‘if a company’s products taste good, buy the shares; the world will never be bored of being informed or entertained; and the pros are always too cautious about the stock market’.

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