This FTSE favourite is now a classic value play

Such a fall from grace poses difficult questions for investors. Should we follow the Buffett/Munger formula and become greedy when others are fearful, or sit on the sidelines until a more obvious price recovery takes hold? The decision rests on two key points: what are St James’s Place’s strengths? And has the market overreacted to a short-term, external issue (in this case, fee pressure from the FCA)?

Simon Gergel, portfolio manager of the Merchant's Trust (MRCH), recently sold the fund’s holding in St James’s Place due to short-term uncertainty. However, we believe investors should be looking carefully at the company as a potential recovery play on the basis that corporate actions, together with improved sentiment, could defy the depressed valuation. It is also worth bearing in mind that the market often overreacts to news in a way that creates opportunities for investors.  

Unwavering loyalty 

A key question is whether there is a sufficiently firm foundation for chief executive Mark FitzPatrick, who was appointed in September, to rebuild the business upon. So far, there has been no evidence that pressure from the FCA, and a subsequent announcement from the firm that it will scrap exit fees on the “vast majority” of new investment bonds and pensions, has prompted many customers to leave.

Indeed, one of the firm’s defining features is the often extraordinary loyalty shown by its customers. A January trading update reported a funds retention rate of 95.3 per cent, just 1 percentage point lower than last year. The company has many vocal critics, but so far few customers who seem to share the same negative view.

There are several theories as to why St James’s Place attracts this apparently unshakeable loyalty. Certainly, the high exit fees charged prior to the FCA’s intervention were a disincentive to move, but the firm's success might also be related to the demographic profile of its clients. Anecdotally, these comprise affluent individuals in their 50s who tend not to take an active interest in their finances and are happy to allow others to manage their affairs on their behalf. The company itself says that it targets individuals with investable assets of between £50,000 and £5mn, which gives a total potential market of 13mn people in the UK. This is expected to swell to 14.3mn by 2026. 

The shiny nameplate and personal service that the company offers clearly have a place in the market for those who are not sensitive to the cost. While this attitude may seem ludicrous to many active investors, it is an intangible asset that is not reflected in the current valuation, probably because assigning a value to loyalty is beyond reasonable analysis.

It's scale is also crucial. Investors cannot escape the fact that St James's Place manages roughly 10 per cent of the total £1.4tn UK wealth management market, which translates into 900,000 customers and almost 5,000 individual advisers. Those numbers deserve respect and upon this rock the company shall rebuild its church.   

The fees issue

In some ways, the noise around fees is unsurprising. St James’s Place has always had a reputation for charging a lot, and there have long been doubts about how easy its fees are to understand. 

To comply with the regulator's new 'Consumer Duty' rules, early withdrawal fees are to be scrapped on new bond and pension investments in favour of an explicit initial charge and a clear breakdown of what the charge comprises.

The new approach is due to take full effect in 2025. The one-off cost to St James’s Place is estimated at £10mn for FY2023, and profits are expected to fall this year as the changes kick in. Predicting exactly how the overhaul will play out is difficult, however. 

Merchant Trust’s Gergel warned that further regulatory changes may be required, and that the new fee structure could breed implementation challenges. St James’s Place has also attracted comments, which are at least partially fair, that its balance sheet is something of a black box due to its life assurance business.

There are no signs yet, however, that the FCA is not happy with the fee changes. Meanwhile, Panmure Gordon said the new pricing structures “will deal with some of the more obvious headwinds [that] partners have faced when approaching new clients”, adding that brokers can “model the costs long before the benefits”.

There will be huge pressure on individual partners to build on the relationships they have with their clients to win new business based on the new terms.  

The key factor, though, will be whether the company continues to attract the consistent level of positive inflows that have powered its results so far. The last trading update showed new net inflows of £5.1bn. This was marginally below consensus, and way below last year's figure of £9.8bn, but impressive enough given that the attraction of simply holding cash has been the defining feature of the past year. Redemptions are on the rise, but from a very low base.    

St James's Place could also help itself by cutting its generous dividend. Analysts at Panmure Gordon argue that early action on this will benefit the company, in the sense of both saving cash and rebuilding its relationship with the market by removing the yield as a distraction – albeit at the price of income investors no longer adding the shares to their portfolios. 

Precipitous fall 

As recently as the end of 2022, St James’s Place shares were rated at 15 times earnings, on a par with the blue-chip shares in the asset and wealth management sector. Schroders (SDR) is an obvious comparison. However, its precipitous fall since the summer means it now trades on under 10 times. The company sits alongside the average mid-tier wealth management firms that cater to far smaller market niches. This is despite the fact that St James's Place continues to attract positive fund inflows at a level that most managers would envy – and is forecast to do so for at least the next two years. Inflows mean transaction and management fees, and the opportunity to rebuild margins.

This is clearly a high-risk stock and there are still questions over how long its recovery will take. However, the market seems to have overreacted, and this offers a window of opportunity. Customers are loyal, inflows are proving resilient, the brand is powerful and there are clear steps management can take to improve the situation. Therein lies the potential profit for investors.