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Research: Financials
Record’s Q221 trading update confirmed that its new $8bn dynamic hedging mandate has started and that, prior to this, assets under management equivalent (AUME) expanded by 4% in the quarter. The group continues to work on developing new products and is deploying technology to enhance its ability to deliver these and existing products cost effectively.
Written by
Record |
AUME growth prompts estimate increases |
Q221 trading update |
Financial services |
21 October 2020 |
Share price performance
Business description
Next events
Analysts
Record is a research client of Edison Investment Research Limited |
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Record’s Q221 trading update confirmed that its new $8bn dynamic hedging mandate has started and that, prior to this, assets under management equivalent (AUME) expanded by 4% in the quarter. The group continues to work on developing new products and is deploying technology to enhance its ability to deliver these and existing products cost effectively.
Year end |
Revenue (£m) |
PBT |
EPS* |
DPS** |
P/E |
Yield |
03/19 |
25.0 |
8.0 |
3.25 |
2.30 |
13.2 |
5.3 |
03/20 |
25.6 |
7.7 |
3.26 |
2.30 |
13.2 |
5.3 |
03/21e |
24.9 |
6.5 |
2.68 |
2.30 |
16.0 |
5.3 |
03/22e |
28.7 |
8.9 |
3.65 |
2.30 |
11.8 |
5.3 |
Note: *EPS is diluted. **DPS excludes special dividends.
Q221 trading update
In September Record announced that it had, subject to contract, won an $8bn AUME dynamic hedging mandate. This important win is now confirmed and the mandate started at the beginning of Q321 (October) with AUME likely to build over several quarters. In Q221 AUME in dollar terms grew by 4% to $65.9bn, mainly reflecting exchange rate movements, scaling related to mandate volatility targeting and movements in equity and other markets (total +$2.4bn). Net client flows were positive at $0.2bn. Record is continuing to work on product innovation and is making progress in particular on an Impact/ESG bond product (here Record will effectively be managing the underlying exposure and the currency overlay, so similar to a conventional asset management product with fees at an appropriate level). As part of the group’s moves to retain talent and ensure succession planning, a joint share ownership plan was launched in September to provide equity-based incentives to key staff below board level. A sale of 4m shares by chairman Neil Record at 37.3p facilitated the launch.
Estimates raised in response to AUME increase
We have increased our estimates (EPS +13% FY21, +57% FY22) to take into account the moves in AUME outlined above while allowing for the sterling/dollar rate and some average management fee dilution because of the scale of the new dynamic hedging mandate and the move of some passive hedging mandates to a (lower) management fee with the potential for performance fees. There were no performance fees crystallised in Q221 and we have not assumed any in our estimates so this remains a potential source of upside for earnings and dividends.
Valuation: Below peer multiples
Although the shares have responded strongly to the news of the new dynamic hedging mandate, they still trade on calendar 2020 P/E and EV/EBITDA multiples below the average for a group of UK asset-managers. On our estimates, Record’s multiples will fall further as the full benefits of the increased level of AUME flow through.
Changes in AUME and investment performance
Exhibit 1 shows the recent progression of AUME and net flows. Overall AUME in US dollar terms increased by 4% in Q221 and by nearly 13% in H121 to $65.9bn: the year-on-year increase was 10%. In sterling terms AUME was marginally down from end June at £51.0bn versus £51.2bn. There was a small inflow in Q221 and a small outflow for H121 as a whole although, within this, the mix was favourable in terms of fee rates as there were inflows into Dynamic hedging (recent average fee rate c 15–16bp) and outflows from Passive hedging (average c 3bp).
We calculate that the average AUME in sterling terms for H121 increased by 6.8% when compared with the average for H120, reflecting a combination of positive net inflows, market moves, scaling and foreign exchange movements.
Exhibit 1: AUME changes
Year-end March |
Q220 |
Q420 |
Q121 |
Q221 |
Q121 |
Q221 |
H121 |
$bn |
AUME |
Net flows |
|||||
Dynamic hedging |
3.2 |
2.5 |
2.9 |
3.2 |
0.1 |
0.4 |
0.5 |
Passive hedging |
50.4 |
50.3 |
53.9 |
55.6 |
(0.6) |
(0.2) |
(0.8) |
Currency for return |
2.9 |
2.6 |
3.1 |
3.4 |
0.0 |
0.0 |
0.0 |
Multi-product |
3.1 |
3.0 |
3.2 |
3.5 |
0.0 |
0.0 |
0.0 |
Cash and futures |
0.3 |
0.2 |
0.2 |
0.2 |
0.0 |
0.0 |
0.0 |
Total |
59.9 |
58.6 |
63.3 |
65.9 |
(0.5) |
0.2 |
(0.3) |
Markets |
3.6 |
0.5 |
4.1 |
||||
FX and scaling for mandate volatility targeting |
1.6 |
1.9 |
3.5 |
||||
Total change |
4.7 |
2.6 |
7.3 |
||||
Source: Record
Q221 investment performance was negative. The Dynamic Macro Currency strategy, which had performed very strongly in the January-March period (+6.92%) and then surrendered some of its gains in April-June as markets bounced (-3.39%), saw more modest erosion in the latest quarter (0.41%). The more systematic return-seeking strategies were also negative in the quarter and as a result the Multi-Strategy product was down 2.20% in the quarter (but still showing a positive return since inception of 0.33% per annum).
Estimate changes
Changes in key figures from our estimates are shown in Exhibit 2. The main driver of the changes is the increase in AUME highlighted earlier. Importantly, no additional investment in personnel or systems are required to service the new dynamic hedging mandate and this contributes to the substantial increase in our FY22 earnings estimate. We have assumed the $8bn is included progressively in AUME over three quarters. The fee rate is consistent with Record’s other dynamic hedging mandates, based on the size of allocation. We therefore expect the average fee rate, both for the mandate and for Dynamic hedging as a whole, to decrease as the mandate builds in size. Even so, the relatively high fee rate that applies to dynamic hedging compared with passive hedging, together with the assumption that the only marginal cost attached to the additional revenue is profit-related compensation (set at just over 30%), means there is a substantial impact on group profit as the mandate flows into AUME.
As noted earlier, there is also expected to be some dilution of average management fee in Passive hedging as a number of mandates have chosen to transfer from a management fee only basis to one with a lower management fee but with the potential for performance fees. Retaining these mandates on the alternative fee basis should help moderate the persistent pressure on passive hedging management fee rates, for a period.
No performance fees have been crystallised year to date, but, as a reminder, £2.3m was earned in FY19 and £1.8m in Q320. The £1.8m fee was equivalent to 0.4bp of the average trailing 12-month AUME at that point, which is material when compared with the group average management fee of 4.9bp for FY20. Our estimates do not include any assumed performance fees. By their nature, the timing of performance fees is intermittent and their level uncertain.
On a longer view, performance fees are likely to be a recurring feature for Record enhancing both earnings and dividend payments when they arise. New product introductions could help boost AUME, increase average fee rates in some cases and broaden diversification. IT modernisation has the potential both to enable competitive product offerings and to enhance the degree of operational gearing further as Record increases its focus on growth.
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 |
23.7 |
24.9 |
5% |
5.7 |
6.5 |
13% |
2.37 |
2.68 |
13% |
2.30 |
2.30 |
0% |
03/22e |
24.0 |
28.7 |
20% |
5.6 |
8.9 |
57% |
2.33 |
3.65 |
57% |
2.30 |
2.30 |
0% |
Source: Edison Investment Research. Note: *Dividend excludes any special payment.
Our dividend estimates shown above exclude special dividends. The board’s policy is to target a dividend at least covered by earnings and to take into account expected increases in costs and regulatory capital requirements. Given the cost and regulatory capital point we do not expect a special payment for FY21, subject to further estimate changes. In view of the increase in AUME a maintained ordinary dividend may still be a plausible assumption for this year. In light of our FY22 earnings estimate (3.65p) we would pencil in a special payment of 0.70p giving a total dividend of 3.0p.
For more detail on our estimates, see Exhibit 4.
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.
Exhibit 3: Comparing valuation with UK fund managers
Price (p) |
Market cap (£m) |
P/E 2020e (x) |
EV/EBITDA 2020e (x) |
Dividend yield (%) |
|
Ashmore |
384 |
2,738 |
15.4 |
9.6 |
4.4 |
City of London Investment Group |
400 |
203 |
11.1 |
N/A |
7.5 |
Impax Asset Management |
540 |
704 |
36.9 |
27.7 |
1.0 |
Jupiter |
232 |
1,283 |
10.9 |
6.3 |
7.4 |
Liontrust |
1,280 |
780 |
20.5 |
14.6 |
2.6 |
Man Group |
118 |
2,245 |
12.9 |
8.5 |
6.9 |
Polar Capital |
524 |
516 |
11.8 |
7.3 |
6.3 |
Schroders |
2,836 |
7,484 |
16.1 |
11.1 |
4.0 |
Average |
16.9 |
12.1 |
5.0 |
||
Record |
43.0 |
85 |
15.2 |
10.6 |
5.3 |
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 21 October 2020.
Our table shows calendarised figures for 2020 P/E and EV/EBITDA. Record shares trade on below the peer averages for both measures. The 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. The dividend yield of 5.3% is slightly 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 7.0%).
Exhibit 4: Financial summary
£000s |
|
|
2018 |
2019 |
2020 |
2021e |
2022e |
March |
|
|
|||||
PROFIT & LOSS |
|
|
|
|
|
|
|
Revenue |
|
|
23,834 |
24,973 |
25,563 |
24,915 |
28,745 |
Operating expenses |
|
|
(16,735) |
(17,089) |
(17,996) |
(18,523) |
(19,981) |
Other income/(expense) |
|
|
173 |
(8) |
82 |
0 |
0 |
Operating Profit (before amort. and except.) |
|
|
7,272 |
7,876 |
7,649 |
6,392 |
8,764 |
Finance income |
|
|
56 |
113 |
88 |
86 |
86 |
Profit Before Tax |
|
|
7,328 |
7,989 |
7,737 |
6,477 |
8,850 |
Taxation |
(1,182) |
(1,559) |
(1,365) |
(1,231) |
(1,682) |
||
Minority interests |
|
|
0 |
0 |
48 |
40 |
30 |
Attributable profit |
|
|
6,146 |
6,430 |
6,420 |
5,287 |
7,199 |
|
|
|
|
|
|
|
|
Revenue/AuME (excl. perf fees) bps |
|
|
5.1 |
4.9 |
4.9 |
4.3 |
4.9 |
Operating margin (%) |
|
|
30.5 |
31.5 |
29.9 |
25.7 |
30.5 |
|
|
|
|
|
|
|
|
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 |
2.69 |
3.66 |
EPS - diluted (p) |
|
|
2.98 |
3.25 |
3.26 |
2.68 |
3.65 |
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 |
4,288 |
3,698 |
Intangible Assets |
|
|
228 |
288 |
470 |
475 |
475 |
Tangible Assets |
|
|
910 |
761 |
751 |
616 |
476 |
Investments |
|
|
1,115 |
1,112 |
2,472 |
2,472 |
2,472 |
Other |
|
|
86 |
0 |
1,175 |
725 |
275 |
Current Assets |
|
|
29,737 |
31,427 |
31,149 |
30,888 |
33,961 |
Debtors |
|
|
6,775 |
7,562 |
8,704 |
8,001 |
8,991 |
Cash |
|
|
12,498 |
12,966 |
14,294 |
14,736 |
16,819 |
Money market instruments |
|
|
10,198 |
10,735 |
7,958 |
7,958 |
7,958 |
Other |
|
|
266 |
164 |
193 |
193 |
193 |
Current liabilities |
|
|
(5,525) |
(6,158) |
(6,955) |
(6,712) |
(6,604) |
Creditors |
|
|
(2,630) |
(2,736) |
(3,009) |
(2,766) |
(3,108) |
Financial liabilities |
|
|
(2,467) |
(2,621) |
(2,191) |
(2,191) |
(2,191) |
Other |
|
|
(428) |
(801) |
(1,755) |
(1,755) |
(1,305) |
Non-current liabilities |
|
|
0 |
(29) |
(901) |
(451) |
(451) |
|
|
|
|
|
|
|
|
Net Assets |
|
|
26,551 |
27,401 |
28,161 |
28,013 |
30,604 |
Minority interests |
|
|
0 |
60 |
132 |
92 |
62 |
Net assets attributable to ordinary shareholders |
|
26,551 |
27,341 |
28,029 |
27,921 |
30,542 |
|
|
|
|
|
|
|
|
|
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 |
14.0 |
15.3 |
|
|
|
|
|
|
|
|
CASH FLOW |
|
|
|
|
|
|
|
Operating Cash Flow |
|
|
2,746 |
7,026 |
6,543 |
6,491 |
7,315 |
Capex |
|
|
(236) |
(72) |
(243) |
(140) |
(140) |
Cash flow from other investing activities |
|
|
7,899 |
(561) |
1,513 |
(64) |
(64) |
Dividends |
|
|
(6,810) |
(5,517) |
(5,888) |
(5,394) |
(4,578) |
Other financing activities |
|
|
(10,367) |
(613) |
(943) |
(450) |
(450) |
Other |
|
|
146 |
205 |
346 |
0 |
0 |
Net Cash Flow |
|
|
(6,622) |
468 |
1,328 |
442 |
2,083 |
Opening cash/(net debt) |
|
|
19,120 |
12,498 |
12,966 |
14,294 |
14,736 |
Closing net (debt)/cash |
|
|
12,498 |
12,966 |
14,294 |
14,736 |
16,819 |
Closing net (debt)/cash inc money market instruments |
22,696 |
23,701 |
22,252 |
22,694 |
24,777 |
||
|
|
|
|
|
|
|
|
AUME |
|
|
|
|
|
|
|
Opening ($'bn) |
|
|
58.2 |
62.2 |
57.3 |
58.6 |
71.4 |
Net new money flows |
|
|
(1.2) |
(4.5) |
4.6 |
5.0 |
2.7 |
Market/other |
|
|
5.2 |
(0.4) |
(3.3) |
7.8 |
0.4 |
Closing ($'bn) |
|
|
62.2 |
57.3 |
58.6 |
71.4 |
74.4 |
Source: Record accounts, Edison Investment Research
|
|
Research: Financials
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