As expected the resignation at the end of the first quarter of star fund managers George Godber and Georgina Hamilton who run Miton’s flagship CF UK Value Opportunities Strategy Fund (‘Star asset managers poached from Miton Group’, 7 Apr 2016), prompted an outflow of funds. In fact, assets under management (AUM) in that fund declined from £783m at the start of the second quarter to £388m at the end of June, a decline of almost £400m. It also reversed strong fund inflows in the first quarter which increased total AUM across all Miton’s funds from £2.78bn at the start of January to £3.03bn at the end of March. By the end of June, total AUM had declined to £2.54bn, largely reflecting the outflows from the UK Value Opportunities Strategy Fund.
However, there are several positives. Firstly, the company reacted swiftly and appointed Andrew Jackson to manage the flagship fund from the start of July. He had previously managed the top quartile performing Ecclesiastical (now EdenTree) UK Equity Growth Fund from November 2003 until his departure last summer. In that time the fund returned 263 per cent which compares favourably with the sector average return of 153 per cent. Clearly, it’s difficult to ascertain whether this appointment will have stopped the rot, but his background as a classic, no-thrills stockpicker makes him well suited for the leadership role on the CF Miton UK Value Opportunities Fund given it already has a history of delivering attractive returns, with stock weightings that are largely independent of the mainstream indices. There is a case to be made that investors who have not already divested are probably willing to give him the benefit of the doubt.
Secondly, it’s clear that several of Miton’s other funds continue to generate net inflows. For instance, despite the difficult market backdrop, CF Miton UK Multi Cap Income Fund attracted significant inflows. AUM here increased from £378m in January 2015 to £586m at the end of last year, and this had risen again to £641m at the end of June. The fund now accounts for 25 per cent of total AUM. The CF Miton US Opportunities Fund continues to pull in new investors too, buoyed by a first quartile investment performance. AUM here rose from £129m to £184m in the first six months of this year. The company’s new European Opportunities Fund launched in mid-December and is gaining traction with AUM now around £65m. And Miton UK MicroCap Trust (MINI), which raised gross proceeds of £50m at launch 15 months ago, has raised a further £28m through a subsequent ‘C’ share issue. In aggregate, these four funds have increased Miton’s AUM by around £200m, so offsetting the negative impact of the fund outflows from the CF UK Value Opportunities Strategy Fund.
Impact on revenues and profits
I was reassured to hear that average net revenue margins will “be at least at the same level as last year”, implying a net margin of 65 basis points, and the cost base remains unchanged. So, with the company generating gross revenues of £12.2m in the latest six month trading period, up from £10.4m in the first half of 2015, then it seems realistic at this stage to expect net revenue after commissions to still remain on course to rise from £15.7m in 2015 to around £19m for the full-year. On this basis, expect Miton’s pre-tax profits to increase by around half to £4.4m and deliver EPS of 1.9p, up from 1.2p in 2015, and support a 14 per cent hike in the payout to 0.8p a share as Mr Duncan predicts.
I would also flag up that even after paying out bonuses and last year’s final dividend, the company’s net funds have increased from £14.1m at the end of 2015 to £17.4m at the end of June, a sum worth more than 10p a share. This means that Miton’s shares are being priced on a cash adjusted PE ratio of 7.5 times this year’s expected earnings. The prospective dividend yield is around 3.2 per cent. This means that net of cash the business is in effect being valued at £27.7m, or 1.1 per cent of AUM of £2.54bn. That’s a very low rating for an asset manager.
The bottom line is that if you followed my advice to buy Miton’s shares when I initiated coverage when they were trading just below 23p ('Poised for a profitable recovery', 4 Apr 2015), I continue to see the investment risk to the upside. So, having last recommended holding for recovery at 26p when news emerged of Mr Jackson’s appointment ('Miton replaces stars with a star', 24 May 2016), I now feel that with funds flows in his Value Opportunities Strategy Fund likely to stabilise, and progress elsewhere resulting in net inflows, then Miton’s shares now rate a recovery buy on a bid-offer spread of 24p to 25p. Buy.
