A tale of two wealth managers

After a period of weak returns for its shareholders, has St James’s Place (STJ) turned a corner?

Its market valuation suggests so. Since last October’s intervention by investor PrimeStone Capital, which accused the FTSE 100 group of nurturing a bloated cost base, the shares have climbed by more than 70 per cent. The activist’s involvement was probably welcome, though a more forceful earnings catalyst came a fortnight after PrimeStone’s letter, as positive vaccine news reset the outlook for market and client sentiment.

Results for the first half of 2021 show the full-force of this swing to optimism. Gross inflows climbed from £7.3bn to £9.2bn, thanks to improved client engagement and household savings rates. Even after adjusting for outflows and income withdrawals, the effect of rising markets and a surge in client allocations to US equities meant total funds under management (FUM) hit £144bn, a rise of 11 per cent in six months.

There’s more than a general pandemic recovery for shareholders to buy into. St James’s Place aims to grow both new business and net inflows by 10 per cent a year, pushing FUM to at least £200bn by 2025 – and to as much as £260bn. If “controllable” costs can grow at 5 per cent or less per year, as guided, earnings should improve markedly.

Analysts at Numis are buying it. The brokerage, which expects earnings of 74p per share in 2021, thinks that management targets and operational gearing could translate into a surge in annual cash profits to £900m. They believe a £30-per-share total return by the middle of the decade, comprising £26 in share price gains and £4 in dividends, is plausible.

It looks a big ask, though it’s hard to spot the opportunity for an explosion in profits from the Cirencester-headquartered firm’s somewhat complicated accounts, and their extensive notes on funds in gestation and loans to partners.

Complexity also remains one of the chief criticisms of the company’s client fee structure. The most notable came from financier Helena Morrissey, who stepped down as a non-executive director this year having previously questioned if the company’s “fund charges are transparent and fair”.

Over the years, reports have repeatedly cited the middling performance of St James’s funds and accused the group of locking in clients with punitive exit fees. Amid the industry-wide pressure on fees, shareholders should remain on their guard for higher outflows. A rise in the ‘implied surrender rate’ in the period, from 3.5 to 3.9 per cent, is a trend management will want to stop.  

But the fact remains that client retention levels remain at 96 per cent. For equity investors, it is hard to ignore this level of earnings visibility and customer retention.

Rathbone Brothers (RAT), a smaller peer of St James’s, had a harder time hanging on to client business in the first half of 2021. Though group FUM climbed 8.2 per cent in the period to £59.2bn and a fifth against the June 2020 comparator, the core investment management division again saw a high proportion of withdrawals relative to new business.

While organic new business grew 24 per cent year on year to £2.3bn, client outflows rose at a similar rate to £1.9bn, meaning management was probably more reliant on market effects and investment performance than it would have liked.

With one eye on addressing weak organic growth, the firm is in the process of acquiring Saunderson House, a financial planning-focused investment manager that caters to high net-worth individuals. Long-term, the addition of £4.7bn-worth of assets from the takeover looks like good news for fee income, as is continued momentum in Rathbone’s retail fund business, which has now grown 53 per cent in 18 months to £11.4bn.

Analysts at Peel Hunt upgraded their 2021 adjusted earnings forecast on these numbers, to 152p per share, leaving the shares priced on around 13 times’ profits – around half the valuation commanded by St James’s.

That feels harsh given the similarity in the drivers of the two businesses, and suggests that the market is much more confident in the larger group’s ability to harness its brand power, marketing nous and self-directed investment strategy. We are less convinced it can hit its lofty targets, and would opt for Rathbones’ slightly shakier acquisition-led story if push came to shove. Hold.