There is a £1 trillion wealth opportunity up for grabs and the share prices of the three biggest listed players St James’s Place, Brewin Dolphin and Rathbones are not reflecting this potential.
Wealth managers are ‘ideally placed’ to get a significant proportion of defined benefit (DB) to defined contribution (DC) transfers, according to RBC Capital Markets, but management has played down the volume of these transfers in the surge of new capital inflows.
In recent weeks, the share prices of a number of wealth managers have hit 12 month lows. At the time of writing, Brewin Dolphin was down 10%, Rathbones down 10.84% and St James’s Place down 15.28% over the last year. Despite this, the sector remains highly regarded by analysts and fund managers alike, with RBC bullish on its growth prospects.
Analysts Gordon Aitken and Kamran Hossain believe the share prices of wealth firms may be underestimating the potential. The pair feel managers are keen to downplay the role of DB to DC transfers due to ‘worries that people may relate it to the 1988-1994 misselling scandal’.
An FCA policy statement in March resulted in a reduction of transfer volumes, as pension specialists suspended transfer services. After a subsequent statement from the regulator in October indicating fears were unfounded, RBC said it expects transfers to now accelerate and has calculated a £938 billion opportunity, with 50% of the assets estimated to end up with wealth managers.
‘We have increased our expectations for gross inflows into pensions by 20% from 2019. This acts to increase our 2020 operating earnings per share (EPS) for SJP by 3.4%, 1.6% for Brewin and 2.5% for Rathbones. We also increase our price targets for all three companies,’ Aitken and Hossain said.
For Brewin Dolphin, Rathbones and SJP, RBC increased its price target to 425p, 2,800p and 1,120p respectively, from the current level of 329p, 2,302p and 1,015p.
Long term play
Yet, for Justin Bates at Canaccord Genuity, the sector has already had a great run over the medium to long term. For investors investing with a five to 10-year view, he still sees wealth management as a good bet.
He notes the sector has a high correlation to stock markets and highlighted that because investors are questioning whether we are in the later stages of the cycle, wealth managers may not be the stocks ‘you want to own in the short term’ though.
Bates said that a number of factors will make the sector attractive in the long term.
‘You want to see good growth in net flows, you’d want to see a revenue margin that is maintainable. You want to see a strong balance sheet [while] taking into consideration what the strategy is over the next three to five years. Screening on that basis in recent years, Brewin has done a very good job in terms of improving the quality of the business,’ he said.
‘They’ve improved by shifting funds away from advisory to discretionary and it has a strong balance sheet and good dividend. Arguably they could find themselves in a position where they could pay a special dividend if they wanted to.’
Another fan of Brewin is Paul McGinnis at Shore Capital Markets, which gives the stock a buy rating.
However, for now he has a hold rating on Rathbones. Although in an assessment following the firm’s Q3 trading update, which saw the business reach £41.3 billion in AUM, McGinnis said that this was good performance ‘in a period where the commentary across the wider wealth management sector, most recently from Hargreaves Lansdown last week, has been of a weaker summer’.
The smaller fish
The smaller listed wealth firms have also seen their share prices fall over the year. But Victoria Stevens and Matt Tonge, the co-managers of the Liontrust UK Smaller Companies and UK Micro Cap funds, have a positive outlook for those they hold.
Stevens said: ‘We are very much process driven and look for significant intangible asset strength, which we believe provides these companies with significant competitive advantage. Of all the intangible assets companies could possess, we look for three in particular: strength in intellectual property, distribution or recurring income, with over 70% of the company’s turnover contracted in advance.
‘The way wealth managers charge is an ongoing fee as a percentage of the assets. All of them will hit on that. Some of them will also hit on the distribution point with nationwide network of offices and relationships. Once they’re selected by clients it becomes a very sticky activity. So the client doesn’t choose to change a wealth manager or adviser lightly.’
Tonge added that while there are a number of issues for the sector, such as increased compliance and investment in IT systems, there are also supporting winds that will help the companies going forward.
Stevens said: ‘There are structural tailwinds, in terms of increasing requirements for financial advice, increased pension freedoms, life expectancy and you have the sheer complexity of the investment and tax wrappers available.’