Record — Enhancing products and service

Founded in 1983 by chairman Neil Record, the company’s main activity is providing currency hedging services, acting as an agent for clients, including public and private defined benefit pension schemes and other institutional investors. Record also offers currency for return, multi-product and related services.

The passive hedging product seeks to provide cost-effective reduction of exposure to currency risk for clients’ international portfolios. To counter competitive pressures from large banks, Record places strong emphasis on providing a tailored service to meet customer requirements and may include additional services as part of its offering. Its enhanced passive hedging service provides the same risk mitigation but aims to exploit structural inefficiencies in currency markets to deliver an enhanced outcome. Dynamic hedging also targets systematic reduction of currency risk while seeking to modify the level of hedging to allow clients to gain some benefit from weakness in their own currency. Currency for return strategies aim to exploit stable inefficiencies in currency markets and include a number of strategies: forward rate bias, emerging market currencies, momentum, value and, recently introduced, range-trading and dynamic macro currency (see comments below). The multi-product category includes mandates where hedging and return-seeking strategies are combined on a bespoke basis.

We have collated Record’s disclosure analysing AUME and management fee exposure in the table above. The first section gives an analysis of AUME, fees and fee rates by strategy. This underlines the importance of hedging services that in total accounted for 70% of revenue in H120. Passive hedging AUME was 84% of the total but the relatively low fee rates that prevail in this area, at c 3bp on average, meant the strategy contributed 53% of management fees.

The client analysis shows a progression in the number of clients over the period shown with a net addition of five in the first half of the current year. This count is by legal entity and a commercial relationship includes a number of entities so there can be lumpy movements in the client count. In total, 38% of clients have been with Record for over six years. The institutional nature of the market served (with 84% of AUME from pension funds) means client concentration is quite high with 76% of fees earned from the top 10 clients.

The geographical analysis shows the importance of Swiss mandates (mainly for hedging services), which accounted for 41% of fees, whereas Europe ex-UK accounted for 74% of AUME. The base currency exposure of AUME at end-March was 57% in Swiss francs, 16% in euros, 13% in sterling and 11% in US dollars. Between FY15 and H120 AUME increased from $55.4bn to $59.9bn with the progression dampened by an outflow of $4.5bn in FY19, primarily from passive hedging mandates where specific developments, including moving to a unitised structure, played a role in the terminations.

Finally, looking at the underlying asset class exposure for the hedging mandates, equity markets account for an estimated 47% of hedging management fees with fixed income 31%. As shown, dynamic hedging mandates were entirely equity related while passive hedging exposure was more balanced, including 42% in fixed income and 29% in other assets.

As announced in its October trading update, Record’s AUME increased by $2.6bn (4.6% or 10.6% in sterling terms) during H120 with most of the increase accounted for by net inflows of $2bn for this period (see Exhibit 2). The main element within this was passive hedging mandates where the net inflow was $1.6bn. Most of the inflow took place in the second quarter and largely reflected adjustments to existing clients’ mandates. Market movements accounted for a positive $1.3bn change whereas foreign exchange and mandate scaling effects generated a negative move of $0.7bn. Compared with end-H119, US dollar AUME was 3% lower whereas, based on reported quarter-end figures, we calculate that sterling-denominated average AUME was marginally lower in H120 than in H119 (0.2%).

The profit and loss for H120 with analysis of changes since H119 and H219 is set out in Exhibit 3. Comments on key areas are below with comparisons between H120 and H119 unless stated.

Exhibit 4 shows the performance of currency for return fund, index and composite performance in the half year and since inception. All showed positive returns in the half year with the Multi-Strategy Composite in particular showing a relatively favourable combination of return and volatility since inception, with an information ratio of 0.55 compared with 0.42 for the Deutsche Bank currency index (in US dollar with equal weighting between carry, momentum and value). Record also reported that the long-term performance puts it in the top quartile of its peer group. The product combines carry, emerging market, momentum, value and range trading strands. The addition of a complementary dynamic macro strategy should help to generate a diversified return. The performance of the Multi-Strategy Fund is still affected by a weak initial period following its launch in 2018 but was positive in H120.

Record has also reported the performance of the enhanced passive hedging programme relative to a fixed tenor benchmark. This showed a half-year return of 0.04% and a since-inception (October 2014) annual return of 0.12%. This is material in the context of Record’s average passive hedging management fee margin of 0.03% per year.

Record continues with its strategy of product innovation to counter downward pressure on fee rates and, with the results, announced the New York hiring of John Floyd, a seasoned FX market manager who has managed a dynamic macro strategy for 15 years. This strategy is more discretionary than Record’s existing, primarily quantitatively driven strategies and is therefore complementary. In particular, it has demonstrated outperformance in periods of heightened risk aversion in markets that have been more challenging for the more systematic approaches.

Another development is to broaden the application of Record’s experience and established market relationships in managing derivatives and derivative overlays by offering a service in asset classes outside currency. Record has for some time managed equity and other derivative strategies to generate synthetic returns on cash deposits required to meet hedging cash flow requirements. As a result this offering has not required significant development of systems and capability. Record expects clients to use this service to facilitate tactical positioning without adjusting underlying portfolio positioning so there would not be related AUME and fees will be reported as part of other investment services income, along with fees from the hedging signal agreement with WisdomTree asset management and other services.

Currency volatility between the euro, US dollar and Swiss franc (Exhibit 5) has been subdued in comparison with 2014/16, but continued geopolitical uncertainties provide a favourable backdrop for Record’s conversations with existing and potential clients. Together with Record’s own work to enhance service levels and develop new products, this has contributed to what the company describe as a good range of new business opportunities diversified by geography and product. The more recent product initiatives and continued measured investment in IT and people should support the prospects for longer-term growth.

As previously, our forecasts do not assume either AUME inflows or outflows beyond those already announced. Similarly, we do not assume any performance fees until these have been crystallised and announced.

The main factors driving changes in our estimates (see below) are the increase in AUME reported for the first half, minor positive adjustments to assumed fee margins based on implied values for H120 and updating the assumed sterling/US dollar exchange rates (significantly negative for FY21) to reflect recent market moves. Further details of our estimates are shown in the financial summary (Exhibit 8).

The group figure for net cash and money market instruments managed as cash was similar to the year-end figure at £23.5m (£23.7m). Stripping out the cash held by seed funds (non-controlling interests) gives an own cash figure of £17.7m.

An updated version of our valuation table, which shows Record in the context of a group of UK asset managers, is shown below. 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.

Although Record’s shares appreciated strongly after the October second-quarter trading update, they previously lagged the asset manager peers and now trade on below the peer average calendar year 2019 P/E and EV/EBITDA ratios. The earnings for calendar year 2019 do benefit from a proportion of the £1m performance fee earned in FY19 and our FY20 Record earnings estimate does not include any performance fees; for FY20 Record is trading on a P/E of 16.3x, only a modest premium to the peer multiple of 15.6x for the same period. Meanwhile, the dividend yield of 5.6% is a premium to the peer average and there is the potential for this to be enhanced with a special dividend, particularly if performance fees are crystallised.