- There are strong long-term drivers of growth for platforms
- Oversold this year even as inflows have fallen
Talk about missing the wood for the trees. Investment platform shares are trading at significant discounts, presenting a notable opportunity to buy into the sector, as more investors manage their own savings and pension pots.
At the same time, macroeconomic headwinds have caused the share prices of leading platforms to plummet this year. Hargreaves Lansdown (HL.) and AJ Bell's (AJB) valuations are both around 55 per cent cheaper than their average five-year positions, according to FactSet. This has raised the likelihood of buyouts in the sector, according to Liberum analysts James Allen and Nick Anderson.
They said that the investment platform sector “remains in the bargain basement, trading at a 49 per cent discount to historical average price/earnings (PE) ratios, and pricing in an average 22 per cent fall in AUA [assets under administration], which we see as somewhat extreme”.
Platform headaches
Consumers are thinking twice about investing amid the cost of living crisis and market volatility. Transaction and advisory fees have struggled as trading levels have dropped and potential investors opt to keep their money in cash.
Hargreaves Lansdown took in £600mn of new business in its first quarter, ended 30 September – £100mn less than in the same period last year. Annual net inflows at AJ Bell's platform business fell from £5.8bn to £4.2bn. Quilter (QLT) suffered net outflows of £118mn in its third quarter. Numis analyst David McCann, while bearish on the company overall, thinks the case for Quilter being put in the takeover target category has strengthened of late.
At the same time, there are ongoing concerns that the Financial Conduct Authority's (FCA) new consumer duty rules could cause issues with fee structures within the sector. The regulator's rules mean firms must “act to deliver good outcomes for customers”. But the platforms themselves already offer good value. That didn't stop a further sell-off after St James’s Place (STJ) revealed it would cap annual charges and remove exit fees in response to the new rules, which has led to the leading wealth manager's shares plummeting by more than 40 per cent this year.
Sectoral risks seem limited, however. Of AJ Bell, Numis analysts said that “while consumer duty rules are likely to drive increased disclosure in terms of fees and other costs related to using the platform, AJ Bell should in our view be in a relatively healthy position as costs are already at the lower end on a number of products”.
It has not passed the FCA by that higher interest rates have boosted investment platform companies’ income as investors have parked money in cash. AJ Bell's recurring ad valorem revenue, which includes retained interest income from client cash, soared by 78 per cent in its interim results on the back of higher rates and cash balances. The regulator wrote to platform chief executives in September to warn about its "immediate focus on retention of accrued interest payments on customers' cash balances".
A refreshing Sipp
Despite headwinds, there is a healthy long-term outlook for the sector. The key secular trend of more and more people using do-it-yourself investment platforms shows few signs of abating. The regulatory environment is pushing consumers towards investing on the platforms, given the shift to defined contribution (DC) pension schemes and the growth of self-invested personal pensions (Sipps). Further, analysts argue that platforms are set to benefit from an ageing UK population, as investors need to put their money into the market for longer.
And the market opportunity is vast. Liberum, whose top platform picks are AJ Bell, Quilter and small-cap Pensionbee (PBEE), calculated that the addressable market for the platforms is around £3tn and that this has only been penetrated by around 31 per cent.
That platforms are still growing client bases in difficult trading conditions has highlighted operational resilience. AJ Bell's platform customers rose by 12 per cent in its latest year. Hargreaves Lansdown is clearly struggling to find new users, however. It added a net 8,000 new clients in its first quarter, taking its total client numbers to 1.8mn. Allen and Anderson at Liberum, who are more bullish on AJ Bell, said Hargreaves was in a privileged position given its scale. "While PensionBee and AJ Bell may be adding more customers than Hargreaves per £1bn of AUA, they may also be paying much more to acquire those customers, leading to an inefficient use of capital," they said.
Liberum's preference for AJ Bell comes from "higher-than-sector average earnings growth", customer growth and the low platform costs.
Meanwhile analyst consensus, per FactSet, is for Hargreaves to grow AUA from £124bn in 2023 to £151bn in 2026. Peel Hunt analysts recently argued the business has “strong long-term prospects, which we do not believe are being fully reflected in the share price”.
