St James’s Place has been dogged by the perception that it charges higher fees than rivals, but any dissatisfaction is yet to show up in the level of new business the FTSE 100 wealth manager continues to record.
Net inflows were £2.91 billion in the three months to the end of September, which, with new business, gained over the first half, equates to an organic growth rate of 5 per cent since the start of the year. It means guidance for net inflows of £11 billion this year — remarkably — remains intact, which would be its second best year for new business on record.
Inflows might be down on the previous two quarters and on the same time last year, but compare that figure with rivals and the amount of cash St James’s Place has managed to pull in and hold on to looks ebullient: take Rathbones, where net inflows were only £67 million in the third quarter, or 0.1 per cent of opening funds under management, compared with St James’s quarterly growth of 1.5 per cent.
Why? Financial advice is a bigger part of St James’s business than operating mainly as an investment manager. Counselling clients not to panic-sell in the face of a downturn has its benefits. A more consistent and superior rate of organic growth has been reflected in the shares’ outperformance versus London-listed rivals such as Rathbones and Quilter over the past three years.
The shares have generated a total return of almost 12 per cent, not brilliant but easily outpacing the negative returns of its peers. Like them, the shares have fallen steeply, reflecting the plunge in markets. At 14 times forward earnings, the shares are trading at almost the cheapest valuation for at least eight years. The shares deserve to be cheaper, reflecting the prospect of weaker earnings as funds under management shrink, sapped by negative investment performance.
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In the third quarter, net investment returns were a negative £1.31 billion but amounted to a loss of £17 billion over the first nine months, leaving funds under management at £143 billion, compared with £154 billion at the end of last year.
The question for investors is whether oscillating markets and rampant inflation derails the company’s ability to achieve medium-term targets unveiled at the start of last year. The wealth manager is shooting for compound new business growth of 10 per cent a year and a client retention rate above 95 per cent, in the hope of reaching £200 billion of funds under management by 2025. It wants to keep the rise in controllable costs — defined as everything but regulatory costs — to 5 per cent. A market slump makes achieving the first of those targets more difficult, while a high rate of inflation means the prospect of hitting the second next year is remote.
Management is aiming to keep growth in costs this year below the headline rate of inflation, but given that is at 10.1 per cent, there is the potential for a sizeable overshoot of the 5 per cent target. Analysts at Numis forecast an 8 per cent rise in controllable costs next year on the back of higher inflation, and a return to 5 per cent growth the year after.
How achievable is hitting £200 billion over the next three years? The magnitude of the growth in funds under management recorded last year gave St James’s Place a head start and assets under management are still £13.8 billion higher than they were at the end of 2020. Over the past three years, funds under management have grown by 43 per cent, even amid tough conditions. If the company can at least keep up the same rate of growth, funds under management would hit £205 billion by September 2025. There is the chance that a recovery in markets could accelerate that rate of growth.
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ADVICE Hold
WHY Remaining on track to hit medium-term growth targets could aid a recovery in the shares
Bunzl
Accelerating inflation and a stronger dollar are benefiting Bunzl, solidifying a record of slow but reliable growth. Yet investors are loath to place a higher valuation on the global distribution group’s shares, which trade at almost 16 times forward earnings, a discount to the long-running average.
Recessionary risk is the biggest cloud hanging over the FTSE 100 constituent, which provides products from first-aid kits to coffee cups to corporate customers worldwide. Still, there is no sign yet of a slowdown in revenue, which rose by almost 9 per cent at a constant currency level during the third quarter and by more than 18 per cent at actual rates (thanks to the group generating about 60 per cent of revenue in North America).
Margins are still expected to be above historical norms, which analysts at Shore Capital think will amount to 7.2 per cent this year, a whisker shy of the 7.3 per cent recorded last year.
Bunzl passes on the higher cost of supplies via sales prices, which also provides a boost to the margin thanks to the operational leverage imbued by the group’s heft in scale. Scarcity of some goods has helped with justifying price rises to customers that might be feeling the pinch of cost inflation elsewhere, according to Frank van Zanten, the chief executive.
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Building scale also means that Bunzl is heavily acquisitive as it fills in gaps within product ranges and geographical reach. The group’s net debt stood at £1.37 billion at the end of August, equivalent to 1.6 times profits, which gives it just under £1 billion to play with before it would reach its target leverage multiple of between two and 2.5.
Roughly two thirds of revenue growth is generated by bolt-on deals, which van Zanten sees more scope for, given less easy financing for rival private equity bidders. Then again, rising interest rates makes funding acquisitions more costly for Bunzl, too, with just under £300 million in debt due to mature next year.
Over the past three years Bunzl has delivered a total return of 49 per cent versus just over 5 per cent from the FTSE All-Share, a marked outperformance that stretches back over five and ten-year periods.
ADVICE Buy
WHY Shares have potential for strong compound growth
