Credit Suisse has delivered a downbeat assessment of Hargreaves Lansdown as it initiates coverage of the FTSE 100 investment platform.
The investment bank initiated an ‘underperform’ rating on the stock with a target price of £17.40, 6% below where shares are trading currently. Its 2020 and 2022 earnings per share forecasts are between 6% and 13% below consensus.
Its analysis follows a similar warning from JP Morgan Cazenove that Hargreaves’ championing of Woodford could result in a £7bn hit to inflows.
Credit Suisse said the full impact of the Woodford Equity Income fund suspension on the business was yet to play out.
Hargreaves delivered 7% higher revenue and an 8% increase in assets under management to a “record” £99.3bn in its full-year results.
But Credit Suisse said the fund was only shuttered toward the end of its reporting period.
“We think this is unsurprising: less than one month would be a very swift reaction time for self-directed investors to decide to leave HL. We believe the risk remains that reputational damage from WEI could yet lead to an uptick in client departures.”
Slowdown in multi manager funds
“The key risk we see for HL is not the near-term impact on Hargreaves Funds AuA in and of itself—but more that there could be a change in customer attitude to HL,” it said.
“The exposure to Woodford Equity Income in the multi manager funds, as well as its continued presence on the Wealth 50 until trading was suspended in the fund, may have had an impact on Hargreaves’ retail client base’s view of the Wealth 50 and the Multi Manager franchise.”
Woodford Equity Income appears in six out of 10 of Hargreaves’ multi-manager portfolios and accounts for 11.6% of the largest fund in the range, Hargreaves Multi-Manager Income & Growth fund.
The £2.7bn fund saw £109m worth of net outflows in the second quarter, most of which occurred after WEIF was gated, and clients have pulled a further £77m in July and August.
Reputational blow would have ‘noticeable impact’ on revenue yields
Hargreaves funds contributed 14% to revenue in FY19 but the investment bank said revenue growth in this area has been shrivelling year-on-year, falling from 28% in 2018 to 19% in 2018 and just 2% in 2019.
Though its funds make up a “relatively small” portion of revenue and assets under management, it is an area of “fee double counting” with the D2C firm earning a 0.45% platform fee and 0.75% management fee and thus would have “a noticeable impact on revenue yields,” the note said.
“We see a potential longer-term knock-on impact relating to customer confidence in Hargreave’s portfolio management/multi-manager skills on the rate of growth in Hargreaves funds from here.”
Fund platform fees made up 43% of Hargreaves revenue in 2019. Earlier this year the group disclosed it had taken £41.1m in platform fees since 2014 on its clients’ holdings in Woodford Equity Income.
Following the suspension of Woodford’s fund, it waived the platform fees to appease clients still trapped in the fund, a move which it estimates has cost £360,000 per month. By those calculations it will have lost £2.2m in revenue by the time the fund reopens this Christmas.
Hargreaves funds liquidity unlikely impacted
When Woodford’s fund finally resumes trading performance volatility could also have a “detrimental impact on performance” for the exposed Hargreaves fund and send clients heading for the exits, the analyst firm said.
In the meantime Credit Suisse said it didn’t believe Woodford Equity Income would affect the liquidity of Hargreaves’ multi-manager range.
Hargreaves Income & Growth had 12.2% invested in Woodford’s fund in July but this fell to 11.6% by the end of August as core holdings like Burford Capital and Eddie Stobart saw their share prices fall, it noted.
