Record’s Q319 trading update showed a 6.5% decline in AUME, reflecting a combination of outflows, market weakness and foreign exchange moves. This leads to a 10% reduction in our FY20e earnings. For the current year the negative effect is more than offset by crystallisation of a further performance fee, which is a reminder of the potential for positive earnings surprises in subsequent periods, where we assume none. Following further price weakness, the valuation appears cautious.
Record’s Q319 trading update for the period to end December showed assets under management equivalent (AUME) down 6.5% in the quarter to $57.8bn, or 4.2% lower in sterling terms. While below the assumption made in our estimates following H119, this was broadly unsurprising in the context of weakness in equity markets and the previously announced mandate terminations in passive hedging ($2.5bn). In the event, not all the $2.5bn has left yet, but will do shortly and there was a (relatively) small additional outflow of $0.5bn in passive hedging. FX moves and mandate scaling, where volatility targets apply, trimmed a further $0.9bn from the total AUME. Positively, there was an inflow in the currency for return area and another performance fee was earned in the quarter (£1.3m, relating to performance over a six-month period), giving total performance fees of £2.35m for 9M19.
The group is still seeing a good level of interest in its services diversified by customer, product and geography. The environment of political and economic uncertainties globally remains conducive to Record’s discussions with potential clients. The performance fee earned in the quarter underlines the point that the enhanced hedging and other mandates capable of earning performance fees have the potential to offset the lower management fees they carry and to counter the competitive pressures that remain a feature of the market. Our EPS estimate for the current year is increased by 12%, reflecting the additional performance fee, and for FY20 the lower AUME starting point results in a 10% reduction (with no performance fees assumed).
The shares trade on prospective earnings multiples that are below or just above a comparator group of UK fund managers, while the dividend yield is 7.5% (before the special dividend), which appears cautious for a differentiated and wellcapitalised business (capital buffer over the regulatory requirement of c £14m).