- Net receipts and acquisitions boost outstandings
- Mandates still dominated by technology funds
Free the numbers from context, and the 12-month period to March 31, 2021 has been quite flattering for financial markets. It started with the MSCI All-World Index in a low at $ 426 (£ 309) and ended with the global equity benchmark rising 60% to $ 680.47, an all-time high.
Plot it on a graph and the deep economic uncertainty that marked much of that time is barely detectable.
For asset managers, these rare periods of one-way mania are usually a welcome boost to performance fees. The high is doubly potent when paired with feverish stock purchases. But for active funds with designs on outperformance, the post-crash rally in equity markets also set extremely high expectations for years to come.
Annual figures of Polar capital (POLR), well known to retail investors for its Technology and Global Healthcare trusts, prove it. At the start of the year, the value of the company’s assets under management (AuM) was £ 12.2 billion; 52 weeks later, the stack was 71% higher at £ 20.9 billion.
Average outstandings for the year – up 18% to £ 16.7bn – paint a more measured picture, but still reflect impressive net inflows of £ 2.1bn for the period. The acquisition of UK asset manager Dalton and two value fund teams from Los Angeles-based First Pacific Advisors added an additional £ 1.7 billion.
The structuring of the Canny deal – in the form of a revenue sharing deal with First Pacific and a cash and deferred consideration share for the Dalton team – allowed Polar to massively expand the imprint of his team with barely a scratch on the balance sheet. Management capitalized £ 25.4million of goodwill as a result of the transactions, while net cash increased by more than a quarter.
This despite a 31% increase in total operating costs, which reached £ 118.5million during the period mainly due to increased headcount, but also due to investments in operational support and the distribution.
Beyond soaring asset values and strong fund performance (we’ll talk about that later), it’s this last front that investors should be most satisfied with. Over the past year, the group has added open-ended fund structures in Western Europe and the United States, significantly expanding the range of investors who can buy into Polar funds.
According to Managing Director Gavin Rochussen, this has tapped into two major sources of international client flows: Asian investors looking to buy into global thematic funds and U.S. investors looking for exposure to non-U.S. equity markets (often cheaper).
Half of the fuknots
Indeed, for buyers of US stocks – who still constitute the largest pool of liquidity in the stock markets in the world – the main attraction of the Polar brand will never be the Polar Capital Technology trust. After all, the main investor audience of the tech team – which now manages £ 10.2bn – have fewer options to match the performance of the Dow Jones Global Technology Total Return Index.
Polar’s success in this endeavor – over three, five, and 10 years – has been a major contributor to its brand cache. Breaking free from a strong focus on technology and health is nevertheless a challenge.
Rocussen highlights the success of UK value, finance and emerging markets teams from vaccine-triggered rotation to value as evidence that expanding Polar’s stable can benefit from several different asset allocation strategies . But technology still increased its share of total assets over the year, from 43 percent to 49 percent.
“The more we run, the more we have to run,” Rochussen concedes. “All of these positive diversification streams are still struggling to keep pace with technology.”
Along with investors’ continued pivot to stocks and financials, a potential way out of this conundrum is coming in September, in the form of a sustainable investment team from Robeco Switzerland. The group, which manages more than 5 billion euros (£ 4.3 billion), will launch strategies focused on two already very popular themes: clean energy and electric vehicles.
Some may conclude that this is simply adding exposure to sectors where valuations are already very high. Others will see these types of funds as must-haves and good cross-selling opportunities. Polar’s mantra, Rochussen says, is unequivocal: provide a product that beats the benchmark.
Cheap for arright?
The consensus forecast compiled by FactSet projects earnings of 64.4p and 73.7p per share for fiscal years 2022 and 2023, respectively, meaning that stocks are trading at a slight discount to the broader sector of management. ‘assets.
One of the effects of this has been to push Polar’s expected dividend yield up to 5 percent, which seems a bit harsh given the obvious growth opportunities and the strong brand. For comparison, the near-term income outlook of other well-known UK active managers Liontrust (LIO) and Impax (IPX) appear to be much weaker, despite their concentration in certain growth sectors.
We believe this caution is a function of two investor concerns: that Polar’s huge weighting in hot growth stocks could suffer in a higher interest rate environment, and that diversification efforts to balance the portfolio will result a return to average performance.
Although this latter dynamic should never be dismissed, it risks ignoring Polar’s business model, which is based on offering a range of specialized thematic funds. Neither its scale nor its focus puts it in competition with the passive giants, which broker Numis rightly calls “a race to the bottom for an active manager”.
With a good brand and strengthened distribution channels, stocks still appear to be undervalued by a multiple of 11 of cash-adjusted futures earnings.
The people-centric nature of asset management means that it is a highly cash-generating UK company that is unlikely to succumb to private equity interests. If an offer came from within the industry, we would expect it to be at a massive premium. Buy.
Last seen IC: Buy, 606p, Nov 19, 2020
|POLAR CAPITAL (POLR)|
|ORDER PRICE:||856p||MARKET VALUE:||£ 857 million|
|TO TOUCH:||846-856p||UP TO 12 MONTHS:||856p||LOW: 436p|
|DIVIDEND RETURN:||4.7%||P / E RATIO:||13|
|NET ASSET VALUE:||151p||NET CASH :||£ 133 million|
|Year to March 31||Turnover (£ m)||Profit before tax (£ m)||Earnings per share (p)||Dividend per share (p)|