Record — Resilient with a renewed focus on growth

Founded in 1983 by Chairman Neil Record, the company is a well-established, independent provider of currency hedging services, acting as an agent for clients, including private and public defined benefit pension schemes, foundations 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 tailors its 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 (managed with a more discretionary approach). The multi-product category includes mandates where hedging and return-seeking strategies are combined on a bespoke basis.

Exhibit 1 sets out an analysis of Record’s AUME, fee income, clients and asset class exposure. Within this we would highlight the institutional nature of the client base, the importance of Swiss clients, the contribution of more than 50% to fees from passive hedging and the longevity of clients.

As announced in the April Q420 trading update, Record’s AUME increased by $1.3bn (+2.3% in US dollars or +7.5% in sterling terms) during FY20. This was despite a $3.2bn negative market move for the year including a $4.5bn decrease in the final quarter as COVID-19 affected markets and the value of assets underlying AUME (see exposure of hedging AUME in the final section of Exhibit 1). There were net inflows of $4.6bn with most of this accounted for by passive hedging mandates. The average level of multi-product AUME in the second half benefited from a short-term tactical mandate of $1bn that was initiated in Q320 and ended in Q420.

Based on reported quarter-end figures we calculate that average US dollar AUME for the group was marginally lower than in FY19. However, sterling-denominated average AUME increased by 3% and this accounted for most of the 3.7% increase in group management fees with small changes in mix and hence average management fees making up the balance. Within management fees, the 13% reduction in dynamic hedging fees reflected a c 18% fall in average AUME in this area (in sterling terms), which largely resulted from discretionary profit-taking undertaken by Record on behalf of a client in FY19. Similarly, the near 19% increase in multi-product fees benefited from the boost to average AUME from the tactical mandate mentioned above.

The profit and loss for FY20 is set out in Exhibit 3. Our comments on key areas are below, with comparisons with FY19 unless stated.

Exhibit 4 shows the performance measures for the multi-strategy currency for return fund and dynamic macro currency and multi-strategy composites. The multi-strategy fund and composite have both been adversely affected by the particularly sharp market falls in the final quarter, while the fund in addition is also affected by a weak initial period following its launch in 2018. In contrast the dynamic macro currency strategy performed well in the recent period of market weakness adding to its track record of strength in episodes of market stress. The strategy is managed by John Floyd, an experienced FX professional, and its investment process is more discretionary than Record’s existing, primarily quantitatively driven strategies, and therefore provides valuable diversification.

Record has also reported the performance of the enhanced passive hedging programme relative to a fixed tenor benchmark (using a representative account). This showed a negative FY20 return of 0.05% but a still positive since-inception (October 2014) annual return of 0.09%. This longer-term performance is material in the context of Record’s average passive hedging management fee margin of 0.03% per year though, following recent underperformance, there is likely to be ground to be regained before further performance fees are earned on these mandates.

CEO Leslie Hill seeks to bring fresh energy and a renewed focus on growth to the group. The cornerstones of the group’s strategy are set out as: quality client experience; technology and innovation; and talent development.

The group will continue to deliver a high-quality service to clients and here recent volatility has underlined the value of its experience and relationships in the market at a time when liquidity on electronic platforms dried up and banks returned to their role as key liquidity providers in the FX market.

Record has already been following a strategy of innovation and customisation to counter fee pressure but will now place greater emphasis on developing new products to meet customers’ own identified needs (already mentioned here are ESG/impact investing and adding frontier currencies to emerging market products). This should help diversify revenues and help protect margins.

Continued investment in technology will be required with updating of legacy systems, deployment of third-party services and use of AI are areas of interest that will be pursued on a step-by-step basis to contain risks and ensure that value is delivered. The planned spending (£0.2m ongoing and c £0.3m project spend this year) has the potential to deliver services such as passive hedging and spot FX execution more efficiently and generate rapid paybacks enabling staff to focus on higher-value tasks and the capacity to deal with increased volume.

On talent development there will be greater focus on staff training and securing succession within the business by giving those with talent more responsibility earlier than may have happened previously.

The market has seen a significant spike in currency volatility between the euro, US dollar and Swiss franc (Exhibit 5) as a result of COVID-19. This has underlined the benefits of strategies to mitigate currency risks and maintaining a favourable backdrop for Record’s conversations with existing and potential clients. As noted above, Record’s experience and its ability to maintain services during a period of market disruption is likely to have been beneficial in underpinning the stickiness of its hedging client base. Although volatility has subsided to some extent, the ebb and flow of economic and health-related news may well mean further periods of increased volatility.

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. Normally we only allow for a modest element of prospective performance-driven growth in the equity market exposed dynamic and passive hedging AUME (2% and 1% per annum). However, on this occasion we have allowed for the sharp bounce back in equity markets since the end of March (the MSCI All World Index is up approaching 20%) adjusting for this in proportion to the equity market exposure. Otherwise, we have made small adjustments to assumed fee margins based on implied values for FY20 and updated sterling/US dollar exchange rates. Our cost assumptions are increased to allow for the higher personnel and IT costs described above. For our new FY22 forecast we note that our zero net new money assumption may prove conservative in the light of the group’s renewed focus on growth although, if this proves fruitful, we would not be surprised to see our cost assumption for that year, before variable compensation, rise as well as revenue. 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 £22.3m (FY19: £23.7m). Stripping out the cash held by seed funds (non-controlling interests) gives an own cash figure of £18.0m (£17.9m).

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.

Record shares have outperformed the peers shown over three months (+48% versus 27% on average) but still trade on below the peer average calendar year 2020 P/E and EV/EBITDA ratios. The earnings for calendar year 2020 do benefit from a proportion of the £1.8m performance fee earned in FY20 and our FY21 and FY22 Record earnings estimates do not include any performance fees; we estimate that for calendar year 2021 Record is trading on a P/E of 16.8x, a moderate premium to the peer multiple of 14.9x for the same period. The dividend yield of 5.9% (excluding special dividend) is above the peer average and on a longer view there is the potential for the ordinary payment to be enhanced with a special dividend, particularly if performance fees are crystallised and growth accelerates.