Wealth managers' sturdier income streams justify their premium valuations over their fund management rivals even in the face of all-time UK and US stock market highs, analysts have said.
The wealth management sector is trading at an average 21 times forward earnings, while asset managers are trading at just 14 times, according to date from S&P Capital IQ. With some equity markets at particularly punchy levels and political risk rising, some may wonder whether wealth management's rating is warranted.
Wealth managers Brewin Dolphin (BRW), Brooks Macdonald (BRK) and St James's Place (STJ) all released bullish updates last week. SJP had net inflows of £2.1bn during its final quarter and investment gains of £1.9bn, taking funds under management beyond £75bn.
Brewin Dolphin is shifting increasingly towards discretionary wealth management - where a client outsources the day-to-day management of their money - and away from advisory business. Decent discretionary net inflows of £0.5bn for the three months ended 30 September alongside investment gains means it now runs £30bn in discretionary assets out of a total £36.4bn.
Listed wealth managers have seen average share price growth of 9 per cent over the past year, while difficult conditions for fund managers, including Henderson(HGG) and Jupiter (JUP), mean average share price growth of 7 per cent for that sector, helped by better recent performances from emerging market-focused Ashmore (ASHM) and Aberdeen Asset Management (ADN).
Paul McGinnis believes wealth managers would be a more reliable investment in the event of a market downturn. "The quality of the profits in terms of the assets of the wealth managers are much stickier than the assets of the pure asset managers," he said.
Brooks Macdonald has the most mature discretionary management business. Peel Hunt analyst Stuart Duncan thinks Brooks Macdonald's investment case "remains predicated on outperforming the rest of the sector in terms of asset growth, of which there is continuing evidence, and through operational leverage delivering rising earnings". A recent spike in the shares has meant the stock is now on 'add' rather than 'buy', he says.
Discretionary wealth managers are less dependent on transaction volume, since they operate under a more stable fee income model, rather than a commission-based one. However, the assets under management of pure-play fund managers fluctuate to a far greater degree depending on market sentiment, Mr McGinnis said. Fund managers face additional pressure on fees, particularly from the growing popularity of passive investment products, he said.
