Record has announced that a client has reduced the size of a tactical bespoke currency for return mandate that it was managing by $2.8bn with immediate effect. Consequently, we have lowered our FY16 and FY17 PBT forecasts by £1.3m and £2.0m (17% and 25%) respectively. Record had previously warned that the size of this particular mandate could prove volatile. The company reports a continued high level of client engagement on its passive and dynamic hedging strategies, although it cautions that there are long lead times to transform interest into new mandates.
When Record announced that it had increased the size of a tactical bespoke currency for return mandate by $1.75bn in Q115, it warned that the mandate size was likely to prove volatile. Record was effectively managing currency positions on behalf of a client who could at any time alter their size and direction, which has now happened. Record’s other currency for return mandates are less transactional than this mandate, so tend to be less volatile.
Record continues to report that it has experienced elevated levels of engagement with existing and potential clients on its hedging and currency for return products due to increased currency volatility. We share management’s optimism that new mandates are likely, but our base case forecasts do not include these and management cautions that lead times between engagement and new contracts are frequently long. Its multi-strategy currency for return product had a three-year track record in July 2015, which is the time period that many consultants require before recommending products to clients. Record hopes that it will prove attractive to clients seeking positive returns in a market not so closely correlated with equities.
Record offers investors an attractive yield of over 5% and has a strong balance sheet. The volatile market conditions tend to reduce inflows into traditional asset managers,but for Record, volatility should be beneficial and increase demand for its services. Cash and marketable securities amount to just over 40% of its current market capitalisation.