Brooks margin worries overdone

Structural drivers such as an ageing population and pension freedom changes, coupled with its long-established bias towards discretionary wealth management – which is accompanied by more stable net fee income – has helped Brooks Macdonald continue to gain new business, even against an uncertain UK economic environment. During the 12 months to June 2017 it gained £951m in net inflows, including £332m in the six months following 2016’s referendum.

It built on this during the following two quarters to the end of 2017, gaining a combined £808m. In addition, it made £474m in investment returns. That took funds under management to £11.7bn, equivalent to 12.3 per cent growth in assets during the period, compared with a rise of 4.3 per cent in the MSCI WMA Balanced Index.

However, the benefit of growth in assets to the bottom line during the latter six months of 2017 was partly offset by pressure on revenue yields. Management said this was due to increased competition (including an ongoing shift towards all-in fees and less transactional income), investment for regulatory reforms such as Mifid II, and a change in product mix. In the case of the latter, inflows into its lower-margin Managed Portfolio Service (MPS) funds have been growing at a faster rate than its Bespoke Portfolio Service – accounting for 12 per cent of overall funds under management in 2017, up from 7 per cent during the prior year. Margins at the investment management business fell from 1.0 per cent to 0.94 per cent.

While profit growth is expected to moderate in 2018, analysts expect it to pick back up again from 2019. Brooks’ asset-gathering strength remains undiminished, thanks to its exposure to high-growth parts of the market. The group should also increasingly benefit from growing economies of scale. Its Channel Island-based international business has migrated its data from legacy platforms to one shared with London and has largely completed its shift out of advisory and towards discretionary work.