It’s been a fast growing and top performing fund, having started last year with AUM of £211m. In the past 12 months the fund has produced a total return in excess of 14 per cent which compares favourably with a 4 per cent loss on its benchmark sector. The pair have been poached by an unnamed rival and will serve out notice periods of 12 months and six months, respectively.
This is clearly a blow to Miton which has been performing strongly over the past 12 months: total AUM surged by a quarter to £2.78bn in the second half of last year despite the difficult market conditions, a sharp acceleration on the 8.5 per cent growth rate in the first half. This reflects the fact that eight of the group’s 10 funds have produced first quartile investment performances since launch or since the current managers took over the management of the strategy. It has been increasingly profitable too as the company reported second half pre-tax profits of £2.2m which meant that full-year EPS of 1.43p smashed house broker Peel Hunt’s 1.2p estimate out of the water. Shareholders were rewarded with a 0.67p a share payout, up from 0.6p a share in 2014.
It’s a company I have been following closely, having first spotted the potential in this small cap exactly 12 months ago when Miton’s shares were trading just below 23p ('Poised for a profitable recovery', 4 April 2015), reiterated that advice at the time of the interim results when the price was 26.5p ('Building momentum', 29 September 2015), and again at last month’s full-year results when the price was 30.5p (‘Riding earnings upgrades’, 22 March 2016). In fact, given the momentum in the business – AUM have increased by a further 8 per cent in the first quarter this year – I nudged up my target price from 35p to 38p. Miton’s share price hit an 18-month intra-day high of 36p yesterday before the news of the loss of its star fund managers emerged after the market closed.
Clearly, this is a blow and it’s only reasonable to expect some of Miton’s clients in its CF UK Value Opportunities strategy fund to follow Mr Godber and Ms Hamilton to their new employer in due course. In terms of damage limitation for the fund itself the key will be finding a credible replacement in order to win the support of existing clients to stem the flow.
I would also flag up that Miton is not a one trick pony and other funds have been showing strong momentum too. The CF Miton UK Multi Cap Income Fund saw significant inflows last year as AUM increased from £378m to £586m by the December year end. The Miton UK MicroCap Trust (MINI) which raised gross proceeds of £50m at launch on 30 April 2015, and a further £28m subsequently, has proved a rewarding investment too.
It’s also worth pointing out that the company has a rock solid balance sheet with year-end net funds of £14m equating to about 8p a share. This means that after today’s hefty fall the shares are rated on only 12.5 times last year’s cash-adjusted earnings and offer a 2.6 per cent dividend yield. Moreover, analyst Stuart Duncan at broking house Peel Hunt who raised his 2016 pre-tax profits estimate by 8 per cent to £4.4m post the 2015 financial results, up from £3m in 2015, to produce EPS of 2p, believes that given the length of the notice periods that the “impact is more likely to be on 2017 than 2016 earnings”. This implies the shares are rated on cash adjusted PE ratio of 9 for 2016.
Of course, there will be a financial impact from the loss of the managers. To put this into some perspective Mr Duncan said in a note to Peel Hunt clients this morning that “assuming that revenue margins on the CF UK Value Opportunities fund was similar to rest of group, the fund would generate revenues of approximately £5.5m so loss of assets would have a material impact on group”. In 2015, Miton generated gross revenues of £22m (before commissions and expenses) to produce an adjusted pre-tax profit of £3m.
Although it’s impossible to quantify the level of likely redemptions, clearly some clients of Mr Godber and Ms Hamilton will stay with Miton so the company will not lose all that £5.5m revenue from April next year when Mr Godber leaves. Miton may even be able to poach a replacement fund manager itself. Moreover, in the meantime the company is building up its revenue base from other funds, having launched the CF Miton European Opportunities Fund at the end of last year, for instance.
My feeling is that the knee jerk reaction to today’s news will in hindsight prove overdone and with Miton's shares trading on a bid-offer spread of 25p to 26p, valuing the company's equity at £44m, I would recommend that you hold on for a likely recovery if you followed my earlier advice. Hold.
