And that's quite a contrast with its history because, if ever a stock was floated at the top of the market, it has to be Record's. The shares were sold at 160p in November 2007, just two months after Northern Rock, the savings bank, collapsed. That heralded the credit crunch, when so many of the finance industry's conventional truths were exposed as fiction. One myth was the idea that the price of lots of asset classes would usually move in different directions and that, therefore, risks could be offset against each other and profits assured. Yet when the worst materialised, everything fell in a catastrophic harmony. As a result, so-called 'absolute-return' funds, which were supposed to make profits more or less come what may, turned out to be absolutely no different from all the rest.
That was especially bad news for Record. In 2007 it had a big presence in managing absolute-return currency funds, which, according to the company's flotation prospectus, "the directors expect to continue to increase in popularity as an asset class for institutional investors". At that stage, Record managed $28.5bn-worth (£17bn) of such funds, its biggest – and fastest growing – business segment. Fast forward to the post-credit crunch world of March 2014 and that figure had shrunk 90 per cent to $2.4bn.
Put in that context, the contraction in Record's share price since flotation – 81 per cent to 31p – does not seem so bad. And the good news is there is reason to think Record's foreseeable future will be better than its recent past. For example, 2013-14 brought to an end a five-year run of falling profits – operating profits rose 7 per cent to £6.4m.
Sure, that's a pale reflection of the £39m operating profit Record produced in 2007-08, but that was another world. Today, money managers operate in an environment stripped of performance fees, where dull-and-boring wins the day over smart-and-sexy. Thus in 2013-14 Record generated zero profit from performances fees, whereas in 2007 they accounted for more than half of its revenue. Meanwhile, passive currency hedging – the low-profit, yawn-inducing part of Record's business that was supposed to fade away – has kept the company afloat. Back in 2007 it accounted for just $18bn of the $51bn that Record managed; now it accounts for $40bn out of $54bn.
The price to be paid is in lower management fees in relation to funds managed; after all, providing currency-hedging services is a highly competitive activity and that's likely to restrain the rate at which profits will recover. But at least currency hedging is a steady business that won't go away, or not while the world's nations continue to have lots of different currencies and a relatively open system of trading them. Besides, even the worst memories fade and Record's chief executive, James Wood-Collins, says there is a tentative revival of interest in Record's absolute-return funds.
This implies that Record's 2013-14 profits – £6.5m pre-tax, feeding through to earnings of 2.5p – provide a decent indicator of the future. More important, for the past two years the group's free-cash flow – £5.1m in 2013-14 and £5.6m the year before – has been higher than its net profits. True, the nature of Record's business means it should rarely be burdened by capital spending, so accounting profits and cash generation should move approximately in tandem. But the point is that free-cash flow is comfortably higher than the cost of 2013-14's 1.5p dividend (£3.3m). So this pay-out, which generates a 4.8 per cent yield, looks relatively safe.
Not just that, it's fair to ask why Record is not distributing more. Its capital-spending needs are minimal and it has lots of cash – £27m (and no debt) in its latest balance sheet, compared with a £68m market value of its equity. Okay, its bosses may want cash to 'seed' new funds that the company launches, but is that much needed?
Whether that leaves the share price cheap is uncertain. That's partly because the group's record of falling profits renders a conventional Bearbull valuation exercise otiose, so it’s hard to say where the price should be. And a standard price-earnings based exercise would be meaningless. Nor is there any upwards momentum in Record's share price. Still, if the worst really is over, that may not be too far away.
Shares in Air Partner (AIP) are also without upwards momentum. If anything, the reverse is true. The clearest pattern is the weak trend that started early this year and got a downwards shove in July when the company made yet another profits warning. That sent the price to its present 330p, 47 per cent down in 2014 alone.
True, by nature Air Partner flies by the seat of its pants, so warnings should not surprise too much. It earns its crust by chartering airplanes for pretty well any purpose imaginable; an activity for which it has few long-term contracts and much business that comes and goes on an ad-hoc basis. So the company's staff will know there is the bread-and-butter work of chartering planes for package holidays. Similarly, when major events are due – such as football's World Cup – there will be predictable work flying in specialist equipment, followed by more work to fly teams, hangers-on and fans to the venues. But lots of other business – the marginal stuff that turns the company from loss to profit – is unpredictable. For how many wedding parties bound for India will the company have to arrange flights? For how many humanitarian crises will it have to fix transport flights? For how major consumer product launches will it have to arrange the logistics?
Clearly in its commercial jets division, which accounts for two thirds of the group's £200m-plus annual revenue, not enough. In July, Air Partner's bosses complained of "a continued absence of material ad-hoc projects". This was compensated by a strong performance from its private jets division, which charters small aircraft especially for wealthy folk. Even so, the net result will be another year of falling profits – the third time in the past six years that this will have happened.
This highly erratic record extends to the rate at which the company converts accounting profits into cash and to efficiency ratios, such as the multiple of revenues to capital employed and amounts receivable. Despite this, Air Partner has always been cash rich and it had £19m of cash at the end of July and no debt. True, £11m of that comprises credit balances on the JetCard accounts of wealthy customers. Even so, the £8m remaining would fund the company's 20p per share dividend for almost four years. Better still, in the past two years its free cash flow has comfortably covered the cost of the dividend; though, one has to say, it would not have done if free cash flow were averaged over the past five.
Most of this indicates there is an upwards ride coming from Air Partner's shares. As to when? Who knows. As I said earlier, no upside momentum is developing yet; though its absence is not a worry. My interest in such 'technical' features is minimal.
Also on last week's list was household consumables maker McBride (MCB). If we could be confident that the group could regularly generate its average trading profits of the past five years, its shares would offer great value, priced at their current 91p. Big if. When the company released its last trading update before announcing results for the year just ended, it included the familiar yet depressing tale of the need to make write-offs – still more write-offs. In the previous seven years the cumulative total of its exceptional charges – though, of course, they have become progressively less exceptional – stood at £55m. Soon another £37m will be added, bringing the total to £92m. That sum will have eaten up approaching half the underlying pre-tax profits that the Manchester-based group will have produced over the period. And it would be no good McBride's bosses protesting that much of the charges are non-cash amounts, so they don't really count. They do. Effectively they acknowledge the value that has been destroyed within the maker of Aldi washing powder and Tesco skin-care products. Besides, there is no arguing that the company’s stock-market value has crumpled from a peak of £445m in 2007 to today’s £168m.
It gets worse – McBride's bosses seem to cling to the notion that the company can maintain its dividend. That's debatable. At its present rate, McBride's 5p dividend costs about £9m, yet the company only has £12.5m of distributable reserves. The directors have side-stepped this hole, distributing via capital reserves, issuing 'B' shares that are redeemable for cash. But the cost to the company is the same as a conventional pay-out and it's one that McBride can barely afford. The last time it generated enough free cash to cover the dividend’s cost was in 2009-10. Small wonder that debt remains stubbornly high.
If this is a picture of corporate life when it’s squeezed between the muscle of competitors (Unilever and Procter & Gamble) and customers (say, Tesco and Asda), then it's a grim one. Yet the good news is that McBride will almost certainly survive (unlike its dividend). That's because it is vital for its supermarket-operating customers to be able to offer good quality own-label alternatives to the branded fast-moving consumer items produced by the overmighty giants. And McBride is a key supplier. Its role may not be glamorous; it may not be especially profitable, but it won’t go away.
Which, in a way, is where we came in three paragraphs ago. Capitalise average trading profits for the past five years – £30.6m – at an estimate of McBride's weighted cost of capital, do a bit of tweaking and we can find 137p per share of value, 50 per cent above the current price. That sounds interesting, but that level of trading profit is 38 per cent higher than last year’s and the underlying trend is going sideways at best. So there is no reason to imagine a revival in the share price is coming any time soon – especially as that dividend needs to address reality.
That means I won't be adding McBride's shares to the Bearbull Income Portfolio. Instead, they can go on my watch list. As for the others, from last week’s discussion I have a price target of 900p for shares in Latchways (LTC). That’s only 7 per cent below the present offer price (970p) so maybe I shouldn't be too fussy. Nevertheless, I think I will be.
Which leaves Record and Air Partner. Shares in these two offer the requisite yield (at least 1.2 times the level of the FTSE All-Share index) and each is backed by a strong balance sheet and niche business positions that – though threatened from time to time – are unlikely to disappear. Sure, both have a volatile trading record and their share price is likely to reflect that. But, as I discussed last week, that might even be good for the income fund.
So I will do the necessaries to buy holdings in these two. That means lightening my exposure to FTSE 350 stocks. In particular, the holding in Vodafone (VOD) will go and the one in GlaxoSmithKline (GSK) will be reduced. That still leaves unsettled what to do with the loss-making position in bookmaker Ladbrokes (LAD). That’s the next task.
