After three quarters with outflows in assets under management equivalent (AUME), Record (LON:RECL) reported a modest inflow in its first quarter ($0.3bn) and the number of clients also ticked up. Competitive pressures remain a feature but the group is countering this with its focus on innovation and service enhancement. The breadth of new business opportunities is encouraging. A combination of sterling weakness and mix changes has led us to revise estimates, with EPS increases of 9% and 8% for this year and next.
Q120 update
Record reported AUME of $58.3bn at the end of Q120 (30 June), an increase of 1.7% or 4.0% in dollar and sterling terms respectively in the quarter. Market-related movements were neutral, while FX and volatility targeting related moves added $0.7bn. The $0.3bn inflow mainly arose from the partial reversal of an earlier $1.1bn reduction when Record took a tactical profit on behalf of certain dynamically hedged mandates. The number of clients increased from 65 to 68, with the flow movements implying that the new mandates are relatively small. However, where these are new relationships or for funds, there is the scope for growth over time. There were no performance fees crystallised during the period and fee rates were broadly unchanged. For further details see overleaf.
Outlook
The macro backdrop, with significant tail risks, continues to provide a favourable background for Record’s discussions with potential clients and it reports an encouraging range of new business opportunities diversified by geography and product. Our estimates exclude potential AUME inflows (or outflows) and do not include performance fees until crystallised. For FY19, performance fees of £2.3m were earned (9% of revenue or 0.5bp of average AUME compared with the 5bp average management fee rate). Weakness in sterling, together with the inflow reported and mix changes, have resulted in increases in our estimates with EPS up by 9% for FY20 and 8% for FY21.
Valuation: Multiples below asset manager peers
The shares bounced following the full year figures, but have been stable subsequently and, following our forecast increases, the P/E and EV/EBITDA multiples for calendar 2019 (12.3x and 7.6x respectively) are clearly below the asset manager comparators that we show in Exhibit 3 (15.6x and 11.0x).
Business description
Record is a specialist independent currency manager that provides a number of products and services, including passive and dynamic hedging, and a range of currency for return strategies, including funds and customised segregated accounts.
Q120 trading update
The quarterly update to the end of June 2019 showed AUME of $58.3bn, an increase of 1.7% in dollar terms, as noted above. AUME and net flow details for Q120 are shown in Exhibit 1.
Investment performance was broadly positive. While the FTSE Currency FRB index excess return was negative (-0.61%) in the quarter, the Emerging Market product (ungeared) generated a return of +3.04% and the Multi-Strategy composite, targeting 4% volatility, recorded a three-month return of +0.90% and has an annualised performance since inception of +1.37% per annum.
Estimate changes
Exhibit 2 shows the changes in key figures from our forecasts following the trading update. As mentioned, sterling weakness was the main driver, augmented by the inflow to Dynamic Hedging and modest mix changes. Exhibit 4 shows a full financial summary with our new estimates.
Valuation
We have updated the table showing Record’s valuation in the context of a group of UK asset managers. While Record is differentiated by its role as a specialist currency manager, it does earn fees largely based on the size of AUME so, like the asset managers, is exposed to movements in underlying equity and fixed income markets as well as flows.
Record trades on below average P/E and EV/EBITDA ratios (calendar 2019) and an above average yield. The calendarised P/E figure shown here does include a portion of FY19 earnings which benefited from a performance fee, but even on our FY20 estimate (no performance fee assumed) the multiple would be 13.5x: still below average.
