Does investing in asset managers still make sense?

Long seen as leveraged plays on the market, asset managers’ improving cash positions may give them more defensive qualities as they face up to a changing fund management landscape.

Managers including Troy’s Francis Brooke and Lindsell Train’s Nick Train are among those who have bought into selected asset managers in the belief that strong balance sheets will help groups withstand the headwinds of a risk-on/risk-off equity market.

Central to this theme is Aberdeen, a recent entrant into the FTSE 100 recently described by Brooke as a “cash machine“.

Richard Watts, manager of the £750 Old Mutual UK Select Mid Cap fund, holds 3.1% of his portfolio in Aberdeen, making it the one of the largest positions in the fund.

Watts estimates the group will almost double the cash on its balance sheet to £200-250m by the end of the year thanks to a positive fee margin shift, and analysts are also positive.

“We expect the company to review upwards its 50% payout ratio now that it has net cash rather than net debt,” said Numis.

Other asset managers’ cash positions have also taken a turn for the better in recent months: the Numis team notes Jupiter’s improving balance sheet as a reason for optimism on the stock.

Jupiter announced a 13% increase in its dividend in March as it moved into a net cash position and the broker believes it can revise upwards its 40% dividend payout ratio in the medium term.

Further down the cap scale, Singer Capital Markets suggests Liontrust’s April acquisition of Walker Crips may spur on the company’s turnaround story. Liontrust retains around £5m in cash following the deal and will see margins improve as a result.

“The acquisition clearly benefits cash flows and accelerates the prospect of a return to dividend payments in due course,” Singer said.

OMAM’s Watts said improving cashflows and a diversified base of assets meant companies like Aberdeen are now taking on more defensive aspects.

“There is the prospect of cash-rich asset managers being perceived as a little more defensive, particularly those with a broad spread of assets. These are not steady eddy stocks but companies like Aberdeen do have income characteristics,” he said.

Structural changes

The arrival of the Retail Distribution Review (RDR) at the start of 2013 will bring with it a host of challenges for asset managers, not least on margins themselves. Analysts at Citigroup place that development in the context of the active v passive debate already putting pressure on costs.

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