Currency manager Record (REC:34.5p) has delivered its second consecutive quarter of positive fund flows, lifting assets under management equivalent (AUMe) to $59.9bn in three months to 30 September, up from $58.3bn at 30 June 2019, and $57.3m at the end of March 2019.
Client numbers increased from 68 to 70, albeit the growth was driven mainly from adjustments to existing clients’ mandates. Around 40 per cent of clients have been with the company for more than six years, highlighting the general stickiness of mandates, but there is clear momentum in new client additions, too. Indeed, the company also added 13 new clients in the financial year to 31 March 2019, a reflection of the appeal of Record’s hedging strategies.
Returns for higher margin US dynamic hedging clients were positive in the latest three month trading period, reflecting US dollar appreciation versus a weighted basket of hedged currencies. This segment accounts for $3.1bn of AUMe. It’s worth noting $300m of positive inflows into Currency for Return hedging strategies, too, the highest margin business with $2.9bn AUMe.
True, sterling strength in the past few weeks means that analysts have held their sterling profit estimates even though AUMe beat Panmure Gordon’s second quarter forecast by $1.4bn. But this misses the point that the higher level of currency volatility is likely to drive more clients to seek out hedging policies, a point that chief executive James Wood Collins made this morning. He notes that “economic, political and market uncertainty continues to prevail. The client engagement opportunities which this creates, in conjunction with our ongoing focus on enhancement and innovation, have contributed to the inflows we have seen during the period”, adding that “we continue to see an attractive range of further new business opportunities....and remain confident of making further progress in the current financial year".
In the 2018/19 financial year, Record posted an earnings beat when it lifted earnings per share (EPS) by 8 per cent to 3.27p, an outcome that enabled the board to reward shareholders with a bumper dividend per share of 2.99p including a special payout of 0.69p. The board’s policy is to declare almost all of net profits as a dividend after adjusting for regulatory capital requirements. That’s because the business is highly cash generative and has a rock solid balance sheet. In fact, Record holds net cash and money market securities worth £23.7m (12p a share), or a third of its market capitalisation.
Of course, the ability to generate performance fees will be critical to Record's full-year outcome as this income segment accounted for £2.3m of last year’s total revenue of £24.6m and almost 30 per cent of the company’s annual pre-tax profit of £8m. But it’s clear to me that if Record continues to acquire clients, and delivers strong returns for its clients – its Multi-Strategy product delivered a second quarter return of 1.47 per cent – then Mr Wood-Collins optimism will be justified.
Admittedly, the shares have posted a negative total return of 10 per cent since I included them in my 2018 Bargain Shares Portfolio, perhaps a reflection of the change in fee structure which introduces greater earnings risk due to the performance fees. Nonetheless, Record is delivering and, rated on a single-digit cash adjusted price/earnings (PE) ratio whilst offering a bumper dividend yield, I maintain my positive stance ahead of the interim results on 22 November 2019. Interestingly, a share price close at 35p or above would signal an important chart break-out, and one well worth following. Buy.
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