Bailey says that he has long been positive on the sector, believing that it is benefitting from a wholesale shift out of bonds and into equities on the part of institutions. The opening up of the annuity market announced in the budget, which came as a total surprise, will give the industry a further boost, he says, leading to strong growth in the coming years.
“I think it’s quite exciting really,” he said. “Not just for asset managers but wealth managers as well.”
“It’s quite clear that going forward with the changes we have seen to pensions that either insurance companies or clients will require new products and advice, so it’s a two-pronged win-win for asset managers.”
“We have been exposed to a number for quite some time, expecting we will see a return to equities,” he added. “A lot of institutions switched from equities to fixed interest and I think that’s going to be changing.”
“We have seen renewed appetite for equities from private investors and a sign of this was the sale of Royal Mail.”
“We have seen strong inflows into a lot of fund manager products together with rising markets which has created rising levels of free cash flow at these businesses.”
Bailey adds that the changes to the annuity market could release an extra £12bn into asset management products. Here are the four firms he holds and thinks are the best bets.
Aberdeen
Aberdeen has had a tough time this year as poor performance on the emerging market indices have hit inflows and the share price.
The stock fell suddenly when emerging markets sold off last spring and again at the start of this year when the company’s results showed the effect of the turmoil in its specialist area.
Performance of stock vs index over 1yr
Source: FE Analytics
However, in November Aberdeen bought SWIP, giving it a significant chunk of the UK equity market.
“The issue with them has been over dependence on emerging markets,” Bailey said. “The SWIP acquisition, which we think was fairly cheaply acquired, provides diversification for Aberdeen and dilutes the importance of their emerging market offerings.”
The travails of the company have led it to be one of the most shorted stocks in the UK in recent months, and FE Alpha manager Crispin Odey is one to have been betting on the stock’s decline.
However, the manager’s short position has been reduced in recent months. The stock is a top 10 position in the Liontrust Macro Equity Income fund, making up 4.2 per cent of the portfolio.
Jupiter
Bailey says that one of the major attractions of Jupiter is the potential for dividends worth a 7 per cent yield this year, made up of ordinary and special payouts.
However, the main strength of the business is its strong brand, he explains.
“Jupiter has a fantastic brand,” he said. “It’s one of the top names in the business.”
Data from FE Analytics shows that the stock has performed strongly over three years, returning 38.29 per cent as the FTSE All Share has risen 26.23 per cent.
Performance of stock vs index over 3yrs
Source: FE Analytics
Jupiter sold its private client business to Rathbones at the beginning of this month. Results published shortly after showed funds AUM increased to £25.2bn off the back of £465m net inflows.
Polar Capital
“We invested around five years ago when it was a proxy for technology,” Bailey said. “Ben Rogoff’s tech fund was a substantial part of assets, but the Japanese fund is now over 50 per cent.”
Bailey says that sort of concentration of assets is concerning, but he still has a positive view on the stock.
However, the weighting in the fund is being reduced by not being added to and is now down to 1.4 per cent from 4 per cent.
The technology market still clearly influences the share price, and the company’s stock has sold off in recent weeks as that sector has suffered.
Over three years the company has made 21.34 per cent over 26.23 per cent.
Performance of stock vs index over 3yrs
Source: FE Analytics
Bailey highlights a dividend in the region of 18p to 19p a share this year as a major reason to hold the stock. On a share price of 437p this amounts to a yield of around 4 per cent.
Henderson
“Two years ago it was the ugly duckling of the sector, but it has a very strong European franchise which has been one of the areas they have seen AUM growth over the last 12 months as investors started to return to the region,” Bailey said.
Shares in Henderson have seen a sharp recovery since the start of 2013 and are now up 69.82 per cent over three years as the FTSE has made 26.23 per cent.
Performance of stock vs index over 3yrs
Source: FE Analytics
FE Alpha Manager Richard Pease’s Henderson European Special Situations has seen strong inflows over that time, more than doubling in size to over £1.1bn.
FE Alpha Manager John Bennett’s Henderson European Selected Opportunities has also seen strong performance and strong inflows, as has his five FE crowned Henderson European Focus.
The company’s closed-ended European funds have also performed well over the past year.
