Record — Scene set for marked profit improvement

We have updated our compilation of the information Record provides on AUME, fee income, clients and asset class exposure (Exhibit 1). This also includes our calculations of estimated average fee rates by strategy and hedging fee exposure by underlying asset class.

We highlight a number of points:

As announced in the April Q421 trading update, Record’s AUME increased by $21.5bn (+37% in US dollar, or +23% in sterling terms) in FY21. As shown in Exhibit 2, this reflected a combination of net AUME inflows, positive underlying market moves since March 2020 and exchange rate and scaling moves. There were net inflows of $9.7bn with the largest move being in dynamic hedging, mainly arising from the large dynamic hedging mandate announced in September 2020 (a further inflow of c $1.3bn is possible for this mandate in subsequent quarters, depending on market movements). Following the pandemic-affected final quarter of FY20, FY21 saw a strongly positive market-related movement in AUME of $8.4bn.

Using reported quarter-end figures we calculate that average AUME for the group increased by 10% in sterling terms. As noted earlier, the increase in management fees was moderated by a reduction in passive hedging fees (-5%) despite a 7% increase in average AUME as some clients switched to a fee structure incorporating lower management fees but with the potential for performance fees; we calculate the average management fee rate in this area declined to 2.7bp compared with 3.0bp for FY20. There were smaller declines in the calculated average fee rates for dynamic hedging and currency for return but an increase for multi-product. For the group, mix changes meant that the overall average fee rate was little changed at 4.8bp compared with 4.9bp.

The profit and loss account for FY21 is set out in Exhibit 3. We comment on key areas below, with comparisons with FY20 unless stated.

On product performance, Record reports that a representative account of its enhanced passive hedging strategy (which aims to reduce the cost of hedging by managing implementation flexibly) achieved a positive return of 5bp relative to a fixed-tenor benchmark during FY21 and has had an 8bp per annum return since inception. These figures are material relative to the average passive hedging management fee of under 3bp cited above. In a period of US dollar weakness, dynamic hedging programmes hedging non-US dollar exposures back into US dollar base currency produced a negative return (-0.49%) compared with an unhedged position but have had a 0.45% positive return per annum since inception (the strategy seeks to modify the level of hedging dynamically so that US investors, for example, retain some of the benefit of periods of strength in international currencies).

The multi-strategy currency for return strategy, which incorporates forward rate bias, emerging market, momentum, value and range trading strategies, generated a positive return of 2.86% in FY21 and has had a since inception return of 0.86% per annum with volatility of 3.19% per annum.

Since the board decision to place a greater emphasis on growth and the appointment of Leslie Hill as CEO in February 2020, Record’s strategy has focused on: 1) developing new products in partnership with clients and seeking greater diversification, including looking beyond currency related services; 2) updating IT infrastructure and making use of third-party systems to increase operational efficiency, help enable new product offerings and increase saleability; and 3) talent development and management succession. Progress was made on each of these objectives in FY21.

Record is working on a number of new product offerings with the nearest fruition being the Record EM Sustainable Finance Fund, developed in conjunction with a large Swiss wealth manager. This is expected to launch before the end of June and has involved considerable work in development to ensure the product meets appropriate standards and client requirements. With a fee margin appropriate for an actively managed emerging market bond fund, the fund should itself make a material and potentially growing contribution to Record revenues and also create an additional area for product development in due course. The group is also working on collaboration with a trade finance specialist to offer yield-seeking clients exposure to international investment grade corporates; here the group acknowledges progress may be slowed by the need to address concerns prompted by the Greensill collapse.

The group is proceeding with a range of IT update projects to increase efficiency and facilitate the extensive data handling it undertakes: fortunately, new cost-effective software is available to meet the group’s requirements and the incremental nature of the projects reduces the risks involved in such changes. In FY21 the group invested c £0.4m in these initiatives including operational and capital spending. In the current financial year this spending will increase to c £0.8m. While individual projects are of a one-off nature and IT spending levels may vary over time, management regards such investment as a continuing requirement. Given the increase in scalability and scope to offer products that might not otherwise be profitable, the potential for attractive returns appears good.

On talent development, key staff members have become meaningful equity owners and the plan is to roll-out the ownership and option programme further, underpinning the cultural change that is underway to ensure that a relatively mature business is able to adapt to market changes and opportunities.

For FY22, the addition of the large dynamic hedging mandate that began in H221 is a significant driver of expected growth. We have also allowed for an estimated inflow of c $350m of AUME from the beginning of Q222 as the Record EM Sustainable Finance Fund is launched. We have not assumed further allocations of assets to the fund in subsequent periods at this stage, but increases are possible and could provide upside to estimates in due course. Otherwise, there are small changes arising from updated sterling/US dollar rate and fee margin assumptions. As usual, our estimates do not include any assumed performance fees so any that are crystallised would represent upside from our figures.

As shown in Exhibit 4, our estimates for FY22 are not changed materially.

Our dividend estimate shown above excludes special dividends. Based on our FY22 earnings estimate (4.36p), and assuming a near 100% payout we pencil in a special payment of 2.30p for this year giving a total dividend of 4.30p.

The group figure for net cash and money market instruments managed as cash at the year-end was £19.8m (FY20: £22.3m). Stripping out the cash held by seed funds (non-controlling interests) gives an own cash figure of £16.2m (£17.9m). Summarising the cash flows, net operating cash generation was £6.8m while dividends absorbed £5.8m and share buybacks £1.8m: investing activities and other movements amounted to £1.4m giving the £1.7m outflow in own cash.

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 5. Record is differentiated by its role as a specialist currency and derivatives 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.

The table shows calendarised figures for 2021 and 2022 P/Es, 2021 EV/EBITDA and historical yields. The shares have shown marked strength in response to the increase in AUME and the rebound in markets generally following the initial negative impact of the pandemic. Over one year the shares are up 135% and over three months 39%: this compares with average increases for the comparators of 49% and 14% respectively. Record shares trade above the average P/E and EV/EBITDA multiples but are not the most highly rated on either measure. Our estimates do not assume any uncrystallised performance fees and only allow for estimated inflows for the Record EM Sustainable Finance Fund and the dynamic hedging mandate won last year. The dividend yield of 2.5% is below the peer average but, consistent with the dividend policy, there is the potential for this to be enhanced with a special dividend in due course and, on our estimate including a special dividend, the FY22 yield would be 4.8%.