Record — Underlying growth and pipeline are attractive

In Exhibit 1, we have updated our table of AUME, fee income, clients and asset class exposure. This includes our calculations of estimated average fee rates by strategy and hedging fee exposure by underlying asset class.

We highlight several points:

AUME currently sits at US$84.5bn, up 5% y-o-y but down 4% h-o-h largely due to negative movements in scaling and markets. Within passive and dynamic hedging mandates, and some multi-product mandates, AUME is sensitive to movements in equities and other markets as the mandates are linked to equity holdings and other asset types such as bonds and real estate. Net inflows in H124 were a negative US$1bn – mainly in passive hedging, which is a lower fee earner and hence relatively immaterial – compared to the positive flows in H123 of US$8.6bn. Emphasising the negative movement in AUME were the negative US$2.2bn impacts of scaling and equity and other markets movements. Hence, total change in AUME was negative US$3.2bn.

Management fees increased 3% y-o-y to £19.6m as Record benefited from a higher AUME base (see Exhibit 3). Fee contributions from each product remain broadly proportionate with H123. Record earned good performance fees of £1.5m in H124 but these were lower than the £2.8m earned in H123. Subsequently, total revenues slid 3% to £21.5m in H124.

Administrative costs rose 3% y-o-y as the company increased its headcount to facilitate its expansion plans, particularly in its Record Asset Management (RAM) business, which forms a key part of the diversification strategy. In April, Record also agreed to pay its employees (below board level) a £2,000 one-off payment to help its staff mitigate cost-of-living pressures. Additionally, as of 1 October, Record gave staff a 3% raise to further help them navigate the inflationary environment as well as to remain a competitive employer. Moreover, IT spend remains elevated as the company continues to drive its modernisation programme in three key areas: software development, infrastructure and data management. This is driving scalability and capability, enabling Record to take on more complex hedging programmes with larger asset managers across multiple funds.

Record reported other costs of £0.26m, which were related to legal and administrative fees associated with opening its investment funds. Record should be able to mitigate these costs once its new funds start generating fees.

As a result, operating income was 19% lower than H123, at £6.1m. Record’s profit before tax (PBT) was marginally softened by net finance income of £0.13m earned by pushing its cash into investments and short-term interest-bearing deposits. PBT was reported at £6.3m, 17% lower than in H123.

Net profit was £4.7m, 24% lower than H123, as Record suffered a higher tax rate of 25% (H123: 18%) that was instituted to all UK corporates on 1 April 2023.

Consequently, Record’s EPS fell 24% to 2.48p per share. However, in line with its progressive dividend policy, Record increased its interim dividend to 2.15p per share (H123: 2.05p/share), reflecting Record’s strong cash generation, management’s commitment to returning capital to shareholders and its faith in the longer-term performance of the company. Record maintains sufficient levels of regulatory capital, underpinned by a healthy cash position on its balance sheet. Its progressive dividend policy should not prove a hinderance to maintaining its regulatory capital requirements (required regulatory capital at FY23 was £7.1m).

Record continues to display good performance in its currency management business. We highlight the strong performance in its Emerging Markets Sustainable Fund (EMSF), the fund produced in partnership with UBS Wealth Management, which has earned solid returns over the period and is outperforming its benchmark. The fund is seeing growing investor interest with new pension funds and asset managers being onboarded. Additionally, in H124, Record delivered two new funds in its RAM business: GP Stakes (AUM of US$5m) and Protected Equities (AUM of US$215m). GP Stakes specialises in taking minority equity stakes in alternative asset managers while Protected Equities combines an international equity portfolio with downside tail-risk protection. Record anticipates two further fund launches within RAM and Record Digital Asset Ventures (RDAV) before the end of the financial year.

In RDAV, Record has partnered with Dair Capital, a global asset manager, to launch a digital asset fund in Luxembourg. Record will participate in both management and performance fees and will earn a higher fee if it originates the assets. It plans to launch three funds created by Darren Dineen (CEO of Dair Capital) and Record plans to make his Five Seasons fund one of the first regulated crypto-currency fund in Luxembourg. Record aims to work with the ultra-high-net-worth individuals Darren has worked with in the past alongside new institutional investors. The fund will launch before being regulated, meaning it is limited to raising €600m. Once the fund becomes regulated, it will be permitted to raise more capital. Regarding the fee structure, management signalled that fees would be akin to typical active manager fees.

Additionally, RAM has been working with a number of large pension funds to deliver an Infrastructure Fund that, at capacity, is expected to have c US$1bn in AUM. Although its launch has been delayed (now expected in H224), management emphasises that the cause is not faltering investor appetite, but the legal and regulatory process. The fund involves five Swiss pension funds and one Dutch pension fund – the originator – with Record acting as general partner. The fund lifecycle will be 12 to 15 years and will provide Record with a long-term revenue source, earning higher fee rates than currency management. We note that fees will be earned gradually – only when capital is drawn down in the fund, which is likely to be done in US$150–200m tranches. Management highlighted that the fund has gauged interest from other investors who are interested in a second tranche. Record is also engaged with another client in setting up a Sharia compliant fund, which could help Record unlock a new market.

The long-term outlook for Record remains positive. New funds with higher fees than the currency products, growing investor demand and improving operational efficiency will allow Record to continually grow its revenues and improve its operating margins over time.

Our estimates for FY24 have slightly changed, accounting for decreased fee assumptions on dynamic hedging. While we have broadly kept our AUME estimates the same, rising pound sterling/US dollar rates have slightly lowered our management fee forecasts (since AUME is reported in US dollars but income is reported in pounds sterling). Our performance fee expectations remain broadly unchanged. As a result, we have lowered our revenue estimate by 2%. Our cost assumptions remain broadly the same for both FY24 and FY25 as we expect Record to continue implementing its modernisation programme, which includes further spend in IT, and hire more staff in line with its expansion plan. Lower revenues alongside lower net finance income estimates have led to a 4% drop in our PBT assumption.

We expect Record to continue its progressive dividend policy, increasing our FY24 DPS assumption by 3% to 4.55p per share, representing a 90% ordinary payout ratio on FY24 net income. In FY25, we have not forecasted any material changes. Similar to FY24, we expect a small increase of 2% in the DPS.

In Exhibit 5, we illustrate a peer comparison table of UK-listed fund managers. Record trades at premiums of 17% and 53% to its peers on calendarised price to earnings and EV/EBITDA multiples, respectively. We highlight that Record is noticeably smaller than its peers and is still in a period of high growth. Additionally, Record offers a competitive dividend yield compared to its more mature peers.