Charles Stanley ill-prepared for rocky markets

Charles Stanley lagged competitors in shifting to a discretionary fund management model, where clients sign over day-to-day management of funds rather than agreeing individual investment decisions. That makes the firm more exposed to stock market fluctuations and the increased investor circumspection that typically follows. Discretionary funds – which tend to be ‘stickier’ than those managed on an advisory basis – accounted for only 52 per cent of funds under management at the end of June, compared with 87 per cent at Brewin Dolphin (BRW) and 85 per cent at Rathbone Brothers (RAT). Meanwhile, execution-only accounts – where the firm is simply a broker – represented just over a third of funds under management at the end of December. That means Charles Stanley is more reliant than rivals on trading volumes, which is a much less consistent or predictable revenue stream.

While discretionary funds gained £0.2bn in net inflows during the final three months of 2018, that was offset by net outflows of the same amount from advisory managed and dealing services. Combined with £2.2bn lost from falling markets, that resulted in an 8.8 per cent decline in funds under management over the quarter, worse than the 7.9 per cent fall in the MSCI WMA Private Investor Balanced Index over the same period. That followed net outflows of £0.1bn during the first half, although rising markets back then helped bump up funds under management by 5 per cent.

Investment management fees are calculated as a proportion of funds managed. Consequently, house broker Peel Hunt revised down its revenue forecasts for 2018-19 and 2019-20 by 2.6 per cent and 5.1 per cent, respectively, upon the release of third-quarter figures. Given the group’s relatively fixed cost base – characteristic of wealth managers – Peel Hunt also reduced its operating profit margin forecasts to 6.4 per cent for 2018-19 and 2019-20, from 7.7 per cent and 10.1 per cent, respectively. That should result in adjusted pre-tax profits of £10m in 2019 and £10.1m in 2020 (see table), down from £10.9m in 2017-18, according to Peel Hunt forecasts.

True, the wealth manager has made progress in streamlining its businesses since 2014, when chief executive Paul Abberley was appointed. That has involved selling its capital markets and employee benefits businesses, reducing headcount and consolidating five offices into one. It also claims to have simplified pricing for clients and has been working on growing its customer-referral network. Meanwhile, pay for its fund managers has been revised to better reflect performance.

However, the group is still some way off meeting its target of a 15 per cent operating margin, even though the figure did improve from 8.4 per cent to 9.3 per cent during the first half of the year. At the time, management blamed higher compliance costs and lower than anticipated accrual of new funds when the target was set in 2015.