Record — Robust interim results with strategic progress

Record is focused on three key strategic objectives, and in H125 made progress with each of these. These objectives are:

Organic growth includes leveraging the company’s core strengths, performance and market positioning in hedging and other currency management to selectively build its return-based asset management offerings. The latter are higher margin, have the potential for faster AUME growth and further enhance earnings quality by reducing client concentrations. To be successful, Record continues to invest in its people skills, IT and operations.

Record is very well positioned to benefit from the secular growth trends of rising pension fund assets and private market (ie non-listed) investment allocations. To give focus to the organic growth strategy, Record’s offering is organised around the two key segments of currency management and asset management, which together comprise six core products.

Currency Management comprises four products: Passive FX Hedging, Hedging for Asset Managers, Active FX Hedging (including Dynamic Hedging) and FX Alpha (previously Currency for Return).

Asset Management comprises Emerging Market Debt and Custom Solutions. Custom Solutions includes private credit and infrastructure equity.

The H125 growth in AUME continues the strong trend of recent years, with AUME of $106bn up 85% from the end of FY19.

FX movements1 and, to a much lesser extent, market movements2 have had a significant positive impact on AUME over the past six and 12 months ($6bn and $15.3bn, respectively). Strong net fund inflow in H224, particularly into passive hedging asset management mandates, was partly offset in H125.

With the exception of Custom Solutions, all products increased AUME, both half-on-half and year-on-year, with strong net inflows in focus areas such as Hedging for Asset Managers, FX Alpha and Emerging Market Debt. Following the discontinuation of a tactical interest rate swap portfolio for one client, the Customs Solutions product grouping is now comprised entirely of fund solutions with long-term allocations, including the GP Stakes and Protected Equities funds that successfully launched last year.

The Infrastructure Equity Fund has been in development for some time and had been delayed by the necessary legal and regulatory processes rather than any lack of investor enthusiasm. It is a response to demand from existing and new Swiss pension fund clients seeking tailored private market investment that will benefit from secular trends such as energy transition and digital transformation. The fund will primarily invest in minority equity stakes of individual infrastructure assets worldwide (but mostly in Europe and North America) with a focus on relatively lower-risk brownfield assets,3 and seeks to outperform traditional bonds over a multi-year horizon. The initial €1.1bn commitments to the fund will be deployed over the next three years, with the first investments expected towards the end of FY25, with potential for follow-on tranches. The minimum holding period for each investment is expected to be 15 years and Record expects to earn management fees on deployed funds at the upper end of the range historically earned on Custom Solutions mandates. Based on Record’s initial fee expectations, the annual management fee potential is c £1.7m once the fund is fully invested.

The infrastructure fund has been developed and will be managed by Record Asset Management (RAM), which was established in 2020 to support Record’s diversification and growth strategy. It is regulated in Germany and registered with BaFiN, enabling it to operate as a fund manager and also as a distributor for funds in the EU.

The RAM team has extensive experience in sales, structuring of private and illiquid investments, infrastructure investing and traditional capital-markets solutions. It has been expanded further in H125 and continues to develop a pipeline of future opportunities to develop scalable, customised solutions, with the potential to drive sustainable long-term revenues. This includes private credit and a potential expansion of the GP Stakes Fund.

During H125, the ownership structure of RAM was changed, taking effect from 1 April. RAM management now has a direct equity interest in the business, replacing an original profit-sharing arrangement and aligning its interests strongly to the profitable, long-term growth of the business. Record’s ownership has reduced from 100% to 41%, although it retains a voting share of 51%. RAM remains a fully consolidated subsidiary, with its revenues and expenses fully reflected in the Record income statement. The RAM management 59% economic interest is reported within non-controlling interests (see financial performance comments below).

The H125 financial performance was robust, with the revenue drag from the previously announced H224 product switch by one large client substantially offset and costs well controlled. The switch, from a higher-margin multi-product strategy to a lower-margin passive hedging strategy, had a negative c £3.0m pa impact on annual revenues but had only a partial c £0.8m impact on H224 results. It was fully reflected in H125 and there will be a further, but smaller, year-on-year impact in H225. Despite this, management fee revenues were just £0.6m, or 3%, lower at £19.1m and little changed on H224. Breaking this down further, currency management fees increased strongly, both year-on-year and versus H224, in line with increased AUM, with Hedging for Asset Managers generating a stand-out performance. Within asset management, the decline in Customs Solutions fees primarily reflects the product switch referred to above, as well the H125 tactical interest rate swap discontinuation. EM Debt showed continuing modest fee growth, driven by fund inflows.

In addition to recurring asset management fees, performance fees were broadly in line with H124 but were significantly below the exceptionally high level achieved in H224.

The financial performance summary shown in Exhibit 7 below is on an underlying basis, with H224 adjusted for the exceptional £1.9m (pre-tax) write-off of intangibles that resulted from the company’s strategic decision to bring its IT development in-house.

Looking at the financial performance overall we note that:

Fundamentally, Record is a highly cash-generative business and retains a strong, liquid balance sheet, an important consideration for clients. It has no debt, with cash and money market deposits of £14.3m (H124: £14.8m; H224: £17.5m) and a significant excess of capital over regulatory needs.

The £0.7m loss attributable to RAM management’s 59% economic interest in the business implies a net loss for the business of c £1.2m4 as it positions itself to support meaningful future revenues.

Revenues currently include fund distribution revenues, which we estimate at c £0.5m pa, and as these build, including management fee revenue from the launch of the infrastructure fund, all of which will be reflected in the Record consolidated income statement, we expect RAM to move out of loss and into profitability.

Our forecast for AUME is increased for FY25 but is unchanged for FY26. FY25 benefits from the H125 strength in currency management AUME. For FY26 we take a more prudent stance on the growth in currency management AUME, but expect faster growth in asset management AUME, including from the new infrastructure fund, albeit from a lower end-H125 starting point. The overall mix in AUME across the forecast period results in a slightly lower average fee margin.

For FY25, we expect management fees and administrative expenses to be broadly flat in H2 versus H1, which is consistent with management guidance. For FY26, we forecast good growth in management fees (c 5%), ahead of growth in average AUME (2%), benefiting from the above-average growth of higher-margin AUME. We expect this trend to continue beyond the forecast period, in line with Record’s strategy. Performance fees are difficult to predict, but we assume an additional c £1m in H225 and continue to assume £2m in FY26.

Forecast FY25 costs are also consistent with management expectations, with H2 little changed on H1. We expect Record to keep a tight control on costs, forecasting growth of less than 2%.

Record targets progressive dividends over time and to pay out between 70% and 90% of underlying PBT. Based on our revised forecasts we now expect FY25 and FY26 DPS to be held flat (we previously assumed a modest increase), with FY25 earnings fully distributed and cover building in FY26.

While Record has a different business model to most asset managers, it is nonetheless an annuity fee-driven business model based on AUM, making a comparison with its UK fund manager peer group informative. Record trades at a premium to the group on a calendarised P/E and EV/EBITDA multiple basis. We believe this reflects Record’s strong net AUM inflow performance compared to a mixed sector in which some companies have had material persistent outflows of AUM. For Record, FY25 is a transitional year, including the technology reorganisation and a normalisation of performance fees, before growth returns in FY26, based on our estimates. The dividend yield is competitive with the peer group excluding Liontrust, for which consensus forecasts suggest the current level of dividends will not be covered by earnings.