The recent torrid market conditions are not making life easy for wealth managers, but we think Brooks Macdonald (BRK) looks far better set than rivals as it rides the crest of a wave in demand for its discretionary fund management services. Fees from discretionary fund management tend to be more secure than flighty income from advisory business and Brooks' strong investment performance coupled with a loyal referral network should help it achieve healthy organic growth despite the volatile markets. What's more, having been through a period of increased investment in infrastructure, which had held back profit growth, the company is now in a strong position to capitalise on demand for its services.
- Organic growth
- Outperforming sector benchmark
- Cheaper than competitors
- Shift to more stable discretionary management
- Market volatility
- Slim dividend yield
Brooks' core investment management business, which contributed 96 per cent of the group's profit in 2015, has been receiving healthy inflows of new business from its 17 strategic alliances and growing network of professional advisers. The group finished the first half with £7.8bn under management, which was up from £7.4bn at the year-end. Encouragingly, while the markets have provided a challenging backdrop, the pace of the group's organic growth quickened over the first half. Organic growth in the first quarter of 2016 representing an £180m increase in new business improved to a £214m rise in the second quarter, which demonstrates the momentum that analysts expect to continue in 2016.
Further afield, management has also focused its attention on migrating clients from advisory to discretionary fund management within its Brooks Macdonald International (BMI) businesses in the Channel Islands. Admittedly, the faster than expected transition of Channel Islands' clients ate into profit during the first half, but over the longer term this should also help the business generate a higher-quality revenue stream. The fund business also disappointed in the first half as exceptional charges prevented an anticipated move into profit.
True, market volatility poses a risk to wealth managers, potentially eating into assets and fees. However, Brooks Macdonald has generated sturdy returns in comparison to the wider market. More than half the 6.71 per cent growth in discretionary funds under management during the final three months of 2015 was attributable to investment performance. The 6.71 per cent growth compared with a 3.22 per cent rise in the sector benchmark, the WMA balanced index, during the period. Meanwhile, over the entire first half the difference was starker - Brooks increased discretionary funds by 5.52 per cent compared with a sector benchmark decline of 0.75 per cent.
BROOKS MACDONALD (BRK) | ||||
|---|---|---|---|---|
| ORD PRICE: | 1,766p | MARKET VALUE: | £242m | |
| TOUCH: | 1,766-1,809p | 12-MONTH HIGH: | 2,075p | LOW: 1,377p |
| FORWARD DIVIDEND YIELD: | 2.5% | FORWARD PE RATIO: | 15 | |
| NET ASSET VALUE: | 541p* | NET CASH: | £19.3m | |
| Year to 30 Jun | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2013 | 63.2 | 13.3 | 89.5 | 22.5 |
| 2014 | 69.1 | 13.3 | 85.8 | 26.0 |
| 2015 | 77.7 | 15.1 | 91.0 | 30.5 |
| 2016** | 82.9 | 16.8 | 100.3 | 36.0 |
| 2017** | 93.7 | 20.0 | 120.6 | 44.0 |
| % change | +13 | +19 | +20 | +22 |
Normal market size: 200 Matched bargain trading Beta: 0.08 *includes intangible assets of £65m, or 476p a share **Peel Hunt forecasts, adjusted EPS and PTP figures | ||||
