In its second-quarter update, Record reported a broadly stable figure for assets under management equivalent (AUME), but also included news of a noticeable passive hedging outflow due in Q319. While this prompts 3% and 9% reductions in our FY19 and FY20 EPS estimates, the group is seeing good opportunities to win new business and our estimates exclude both potential AUME inflows and performance fees.
There was a modest net outflow of client AUME during the quarter ($0.6bn), which exactly matched the aggregate inflow in the first quarter. Other moves (related to market levels and scaling of mandates based on volatility) were a net positive of $0.5bn, leaving end-September AUME at $61.8bn, 0.2% below the June figure or, in sterling terms, up 1.1% to £47.4bn. Client terminations in passive hedging are set to result in estimated outflows of $2.5bn in Q319. These arise from clients switching to a different fund structure or hedging approach, although Record notes that there is continued competitive pressure, particularly in passive hedging.
To address competitive pressures and develop the business, Record is continuing to invest in enhanced service levels and new products. The recently introduced enhanced passive hedging product is an example of this, offering clients the opportunity to reduce costs (see discussion of this in our 20 June note). With this update, Record highlights a new approach to emerging market currency hedging that it believes will have wide application. It has already provided the basis for an extension of its licensing agreement with WisdomTree Asset Management. The level of currency volatility (we track this using the one-year implied volatility of exchange rates between the US dollar and Swiss franc and euro) has remained within a relatively narrow range, but prominence of significant geopolitical and macroeconomic uncertainties means that the environment remains favourable for Record’s discussions with potential clients and the company sees encouraging interest across a range of products and geographies.
Record’s shares have weakened since the update, reflecting the prospective passive hedging outflow. This leaves the shares on below peer-average P/E and EBITDA levels, which appears cautious given the potential for inflows and/or performance fees to reverse the estimate reduction we have made for FY20.