I had an interesting interim results call this morning with the directors of currency manager Record (REC:38.5p).
Record’s assets under management equivalent (AUMe) increased to $59.9bn in the three months to 30 September 2019, up from $58.3bn at 30 June 2019, and $57.3m at the end of March 2019, highlighting the positive impact of $2bn of net inflows, $1.3bn of positive market movements, less $700m of currency and mandate volatility scaling. Record also added five new clients in the six-month period to take the total to 70, of which 38 per cent have been with the company for six years or more. This follows the addition of 13 new clients in the financial year to 31 March 2019, an indication of the appeal of Record’s hedging strategies and its investment performance.
For instance, Record’s passive hedging strategies (84 per cent of AUMe), currency for return (5 per cent), and dynamic (5 per cent) all generated positive investment returns for clients. That’s important because performance fees earned do not accrue, but are only recognised after the financial period end, so the strong investment performance augurs well for January’s third-quarter trading update. Analyst Rae Maille at house broker Panmure Gordon is pencilling in performance fees of £1.3m for the 12 months to 31 March 2020. That could be erring on the cautious side if the company maintains its positive investment performance for the rest of the financial year.
Moreover, global economic, political and market uncertainty is positive for new client acquisitions, too. That’s because a higher level of currency volatility is likely to drive both new and existing clients to seek out hedging policies. It’s also supportive of Record’s investment in new products to meet the needs of clients. Having long managed equity and other asset class futures for clients who wish to generate a synthetic return on cash held to meet hedging cash flows, Record is now extending this capability to other asset classes in addition to building momentum in its existing core currency management business.
I would also flag up Record’s rock solid balance sheet. The company holds cash and money market instruments worth £23.4m (11.9p a share), a sum equating to 30 per cent of its market capitalisation. This means that the board is able to pay out a high proportion of earnings per share (EPS) after adjusting for regulatory capital requirements given the highly cash-generative nature of the business. This capital-light business model also explains why Record reported a post-tax return on equity of 23.5 per cent in its last financial year. True, Record’s half-year pre-tax profits fell from £4m to £3.2m, but only because performance fees (that are likely to have been earned) will be recognised in the third quarter. Some investors may not have realised this.
Record’s shares have flatlined on a total return basis since I included them in my 2018 Bargain Shares portfolio, but are 11 per cent ahead since I advised buying before the results (‘Record’s fund flows gain momentum, 17 October 2019). I can see potential for the recent share price strength to continue because they still only trade on a full-year cash adjusted price/earnings (PE) ratio of 10, and are underpinned by a prospective dividend yield of 6.9 per cent (based on a 100 per cent payout ratio of Panmure’s EPS estimate of 2.63p, which could yet prove to be conservative). Buy.
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