The great thing about companies in this sector is that there are only a limited number of factors that really matter and so considering the business as an investment is not overly complicated.
This is despite Miton being in financial services where often the accounts and the real value or business are completely separated.
The two main areas to consider are;
- Assets Under Management. Almost all fees effectively come from the AUM. As a general, (though not absolute rule), double the AUM you double the fees you can charge.
- The staff costs. In the end most asset management firms are far better at funnelling profits into the trousers of the staff and directors than they are at paying out to shareholders.
In both these areas MGR has a story to tell:
AUM increased over the year from £3,823m to £4,378m. A growth of 14%.
Staff costs increased from £10,610k to £12,997k. A growth rate of 22.5%. However in part this increase is because MGR has moved away from a scheme using “Growth Shares” to reward management. This kept profits high but diluted the shareholders significantly and then drew cash out of the company to minimise the dilution. This sort of real, but semi-hidden cost, is very prevalent in financial services and the fact that MGR has decided to move away from this scheme and openly reflect the real costs is I think very positive. The company claims that being open about the costs will add circa £1.8m to staff costs. As this began in October 2018 this suggests about £450k is down to the new scheme. Taking this out you get a growth in staff costs of 18.3%. Ahead of growth in AUM but a more reasonable number. MGR is still a financial services firm so do not expect the Directors to share the cream equally with the shareholders.
The company gives both GAAP and adjusted profit figures. I see no validation for the adjusted numbers so looking at GAAP. Profit before tax went from £6.2m to £8.9m. A growth rate of 43.5% which looks better given the growth in staff costs. I always think it is worth comparing the PBT to the staff costs, which in the case of MGR is 68%. Not a bad, but not a fantastic ratio.
Alongside these two factors there are various secondary factors to consider for a company like MGR.
1 – Can the company market it. Actual performance rates very much second to marketing for companies in financial services. Growth in AUM is almost always driven more by inflows than by performance.
From the accounts MGR took in £1,873m and had £793 redeemed. From a starting point of £3,823m MGR would be at £4.9bn. (And admit to having a year high of £4.9bn). The fact that they finished at £4.4bn shows how poor the investing returns where.
The company claims that 81% of its funds are in the top half of funds. This is down from 87% in 2017.
Overall in 2018 the company clearly could market it.
2 – The general market. When stock markets collapse AUM will fall. Also we live in a market where the trend is very much towards Passive funds when MGR is an avowedly Active manager.
Clearly since November 2017 markets have been volatile. But given Brexit how much more unloved can the UK get? Whilst the growth in Passive has been very dramatic there is still I believe some time for Active managers.
3- Is the company leveraged?
Leveraged financial services companies can va va voom their returns, but if things go bad they can die fast. With a market cap of circa £100m MGR has £25m of cash and had £20m last year, so its not an aberration. Now that it has stopped its “Growth shares” scheme which included a fair amount of buy backs to lessen the dilution I expect that either the cash will grow or more likely the dividends will. Which would be a positive, though yield is already 3.5%.
The concern is that if cash builds up management may feel the need to spend it on acquisitions. But they have not demonstrated that at present.
4-Fee maintenance.
This is a relatively new area for the financial services industry which has traditionally overcharged for its "services". However the rise of the "Passive" industry which bases itself on the thesis that they are not going to do a very good job for you so you might as well not pay much for it is driving down fees both for Active and Passive managers as the debate between the two also includes the belief that by and large Active managers will do not better than Passive and should therefore not charge any more. Fees are being driven down across the industry so even if you double AUM if you halve your fees you are just standing still.
I initially took a small starter position in MGR. I have increased it but see this as a medium term hold. I would sell if my price target was reached or indeed if I felt that either AUM was falling too fast or staff costs increasing too quickly. Or if given significant reason too by one or more of my secondary factors.