Nick Train has hailed Hargreaves Lansdown’s potential for ‘explosive growth’ once the UK economy enters its next upswing, a week after he shelled out around £374 million to double his share of the firm.
In an update to his Finsbury Growth & Income trust, Citywire AA-rated Train noted that the stock had been one of the biggest detractors to his performance in January, as he took his position in the stock from 5% to 10.1%.
‘Yet, to our mind, you don’t have to work too hard to see the bright side,’ he added. ‘It is undeniable that growth slowed at Hargreaves Lansdown [in late 2018], during a very tricky time for UK politics and global stock markets.
‘Nonetheless the business did grow and, importantly, took share – now representing 39% of the direct to consumer platform market and nearly 32% share of the stock broking market.’
Shares in Hargreaves have tumbled more than a fifth from a record high of £22.62 last autumn to a recent £16.56, although even after that rerating it remains priced at an aggressive growth premium of 33.5 times last year’s earnings, versus an investment management and fund peer average of 12.
The group dropped 7% in a single morning of trading last October after it warned that equity volatility was driving an ‘industry wide slowdown’ in net retail flows.
Investors have fretted about the security of HL’s imperial pre-tax profit margins which, while they remain extraordinarily high on a pre-tax measure of 65% in late 2019, have dropped from a recent peak above 70% in late 2017.
Even in the highly cash generative world of asset management, the company still manages to bank around twice the level of revenues of its peer group.
Train, however, pointed out that the company’s willingness to freely spend that cash to stay abreast of the competition was a core selling point for him. ‘Hargreaves has and continues to invest heavily in its client service,’ he wrote.
‘We liked some of the two year statistics the company shared. Over that period the number of clients is up 30% to 1.1 million; transactions on the site have climbed from 5.4 million to 6.1 million per annum. The number of calls to the help desk has increased from 680,000 to 890,000 pa, while – and I love this statistic – the time taken to answer a client call has fallen from 30 to 18 seconds.’
Over the last five years, on a NAV basis Finsbury Growth & Income is up more than 71% versus the FTSE All-Share total return of 31.2%.
The purchase meant Lindsell Train leapfrogged BlackRock and Baillie Gifford to become the biggest holder after founders Peter Hargreaves and Stephen Lansdown.
The overwhelming bulk of the company’s stake is held via Train’s titanic £5.4 billion UK Equity fund, which owns 5.1% of the HL market cap, or 24.3 million shares. The £1.3 billion Finsbury owns a comparatively modest 1.25%, with the remainder held across the group’s funds.
Train is a long-term backer of Hargreaves Lansdown. His conviction puts him at odds with City consensus, which in recent months has fallen to the most bearish point seen in many years, with Barclays the sole house holding it on a buy, on a £20.14 target versus the median £17.05.