Wealth managers have been flagged as a better investment opportunity than investment platforms despite both having similar structural growth drivers.
A note issued by broker Liberum on Wednesday says although there are selective opportunities among the platforms it has a “clear preference” for wealth managers. This is because they trade on significantly lower multiples and therefore offer a more attractive risk-reward profile.
It says the investment platform sector, on the other hand, “continues to be attributed high P/E multiples above 25x, this has only increased following recent market falls”.
Wealth managers with exposure to financial planning favoured
Within the wealth manager space, Liberum notes a preference for wealth managers with a greater exposure to financial planning, singling out Brewin Dolphin and serial wealth consolidator AFH Financial as ‘buy’ ratings and best placed to perform operationally and financially.
M&A has been rife in the industry in recent years as DFMs have sought to broaden their services by bolting financial planning arms onto their businesses.
AFH last month announced it had acquired the client book from Welsh wealth business Juno Moneta Capital, weeks after it went into administration. This came just two months after it announced it was suspending its long-running acquisition spree.
In May last year, Brewin Dolphin acquired the wealth management business of Investec Group in Ireland. Then in August that year it completed the acquisition of Epoch Wealth Management, an IFA firm based in Bath.
Elsewhere, Waverton in December last year announced the acquisition of Timothy James and Partners, an adviser firm based in Tottenham Court Road in London.
In June this year, Pacific Asset Management and chartered financial planning firm Fidelius Group entered into a strategic partnership they said allowed them to re-focus on their respective strengths and add scale.
‘Key competitive advantage’
In the note, Liberum describes Brewin Dolphin’s advice-led offering as a “key competitive advantage”.
“Not only does it provide it with a more compelling proposition for its clients, but also a more defensive source of earnings,” it says.
On AFH, it says the firm benefits from financial planning revenues and has a much higher proportion of initial advice fees than the larger wealth managers. It also notes 20% of revenues come from protection revenues, which are totally unrelated to market movements giving the business a more defensive earnings profile than other AUM-linked businesses.
According to FA Analytics, eight funds in the Investment Association universe hold Brewin Dolphin in the top 10. The top three are BMO UK Mid Cap with a 4.2% weighting, VT Sorbus Vector with 4.1% and Unicorn UK Income at 3.7% of the portfolio.
Only one fund has AFH in its top 10; the Jupiter UK Smaller Companies fund has AFH as its eighth largest position at 2.48% of the portfolio.
Hargreaves Lansdown is the preferred platform
Despite the penchant for wealth managers, Liberum does back Hargreaves Lansdown out of the platform providers and has raised its stance to ‘buy’ from ‘hold’ on the belief that “its brand, best-in-class service levels and agile technology platform enable it to generate returns and resilience that others will fail to replicate”.
“With the shares trading on 30.6x CY21 PE we don’t believe this competitive advantage is adequately reflected,” it adds.
But the broker lists AJ Bell as a ‘sell’, saying despite the attractions of its model, the current valuation (shares trading on 49.5x earnings) is a challenge to justify.
“This is especially because of operational risks to its strategy and the distinct possibility that flow guidance proves too optimistic, especially in the medium term,” Liberum says.
Fund managers say UK savings market is in structural growth
Troy Asset Management fund manager Blake Hutchins holds three investment platforms in the Trojan Income fund that he co-manages with Francis Brooke and Hugo Ure: Hargreaves Lansdown, AJ Bell and Integrafin which owns the Transact platform.
The team used the sell-off in March to top up the fund’s holdings in AJ Bell and Integrafin and to initiate a position in Hargreaves. None of them appear in the portfolio’s top 10 holdings, however.
Hutchins says the team at Troy “just really like the [platform] space” as it believes the UK savings market is in structural growth.
“We think the digitisation of savings is still in its infancy in the UK and they’re phenomenal businesses; they’re scaled technology platforms and therefore they are very financially productive,” he says.
Hutchins adds the beauty of these businesses is that they are incredibly capital light so incremental growth flows through to decent free cash flow growth.
“So they’re in a really nice position to return our investors healthy dividends,” he says. “And that’s actually topped up with special dividends along the way.”
He adds: “When you think about inherently what a dream income stock is, it would be a business that can grow without much capital requirement, and therefore a large part of that free cash flow can come back to end investors in the form of growing dividends.”
Blake Hutchins diversifies platform exposure
But is holding three investment platforms in the portfolio not a concentration risk? Not according to Hutchins who explains that Transact is a platform for advisers whereas Hargreaves is for consumers and AJ Bell straddles both client groups.
“What you have is the pure play in Integrafin and then you have the pure play in Hargreaves, and then you have AJ Bell which is a bit of a hybrid.”
Hutchins says it is also better from a liquidity perspective to have a smaller weighting to all three rather than being over-exposed to one.
“We don’t mind having three as opposed to just having a huge weighting in one because it diversifies risk and liquidity. And frankly, we like all three of them.”
According to FE Fundinfo data, two funds in the Investment Association universe hold AJ Bell in their top 10 – Liontrust UK Ethical and Ninety One UK Equity Income. The Liontrust fund holds both Hargreaves and AJ Bell in its top 10, at the fifth and eighth positions respectively.
Platforms democratise investing
Chris Taylor of the Liontrust sustainable investment team says both platform groups are among several financial services businesses that the team holds that play to a theme it terms ‘saving for the future’.
“Although challenged by short-term economic weakness, we believe households will look to raise saving rates over time to protect themselves from future crises.”
He adds: “We believe both of these platforms democratise investing and provide a low-cost way for individuals to manage their savings. There is an increasing shift of responsibility of retirement funding to individuals and in this context, we feel that companies helping people to take charge of their own finances, whether through structured advice or investment platforms, will benefit from this shift.”
Taylor says Liontrust initially invested in Hargreaves Lansdown but subsequently added AJ Bell to “gain more exposure to this theme while introducing greater diversification at a stock level”.
