Bargain Shares: Lock into a high yielding currency manager

Currency manager Record (REC: 74p) has delivered a resilient operational performance for the 2021/22 financial year, and one that demonstrates the benefits of diversifying the product mix into higher margin scalable products by focusing on client led development opportunities. Effectively, the company is acting as currency manager to asset managers.

In the final quarter, Record delivered $0.8bn of net inflows, well ahead of house broker Panmure Gordon’s $0.2bn forecast, which partly mitigated the $3bn negative impact of adverse markets and exchange rate movements on the value of clients’ investment portfolios being hedged. So, although AUMe declined from a record high of $85.3bn (31 December 2021), it was still almost four per cent higher year-on-year. Post period-end, Record has been awarded a $1bn higher margin dynamic hedging mandate from a client that has successfully booked profits on a prior mandate, and expects another $1bn mandate to be awarded within the next two to four months.

Record also earned £0.5m of performance fees from clients in the latest three-month period by exploiting opportunities arising from a widening of interest rate differentials linked to changes in central banks’ monetary policy. The US dollar index is trading at its highest level since March 2020, having surged seven per cent in value since the start of 2022, a reflection of the ultra-hawkish stance of the US Federal Reserve to counter the inflation threat. Fed chair, Jay Powell, is guiding the market to expect a series of swift half-point rate rises to bring rates to a neutral level which analysts believe to be 2.25 and 2.5 per cent. By contrast, the bond market is only pricing in an increase in the European Central Bank deposit rate from minus 0.5 per cent into slightly positive territory by the year-end. This backdrop incentivises international investors to be long of the US dollar and assets denominated in the currency to benefit from the currency tailwind. The €uro has slumped to a five-year low against the US dollar, a trade that may have some way to run, a positive for Record.

Panmure is pencilling in a 77 per cent increase in Record’s annual pre-tax profit to £11mn when the group reports on 21 June 2022, which produces earnings per share (EPS) of 4.3p and an identical dividend. The group retained net cash of £17.3mn (8.7p a share) at the interim stage, so with capital expenditure requirements minimal, the board’s policy is to return all net profits to shareholders. On this basis, the shares are rated on a cash-adjusted price/earnings (PE) ratio of 15 and offer a dividend yield of 5.7 per cent, a rating that fails to factor in the realistic possibility of Record delivering further net inflows as the year progresses.

Record’s share price has moved sideways since I covered the interim results (‘Bargain Shares: Targeting value plays’, 23 November 2021), albeit this is still a positive outcome in the context of the 9.2 per cent and 15.5 per cent respective declines in the FTSE Small-Cap and FTSE Aim All-Share indices during the same period.

The combination of a high dividend yield – the board has paid out 11.9p a share of dividends since I included Record’s shares, at 43.3p, in my 2018 Bargain Shares portfolio – and upside from multiple organic growth initiatives –  Record launched a Dublin-based emerging market sustainable finance fund in partnership with UBS last summer, and is in the process of launching a Luxembourg based Municipal Loan Fund with Universal Investment as fund manager – point towards the outperformance continuing. The holding has delivered a 94 per cent total return since February 2018, during which time the FTSE Small-Cap and FTSE Aim All-Share indices have returned 27.5 and 0.1 per cent, respectively. It’s difficult to argue with Panmure’s fair value target price of 105p. Buy.

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