Brooks MacDonald offers a range of investment management services and related professional advice to private high net worth individuals, charities and trusts. They also provide financial planning as well as offshore fund management and admin services and acts as fund manager to regulated OEICs, providing specialist finds in the property and structured return sectors and managing property assets on behalf of these funds and other clients.

Portfolio management and other advisory and custody services are billed in arrears but are recognised over the period the service is provided. Fees are calculated on the basis of a percentage of the value of the portfolio over the period. Dealing charges are levied at the time a deal is placed for a client. Performance fees are earned from some clients when contractually agreed performance levels are exceeded within specified performance measurement periods. Financial consulting fees are charged to clients using an hourly rate of by a fixed fee arrangement and are recognised over the period the service is provided. Amounts due on an annual basis for the management of third party investment vehicles are recognised on a time apportioned basis.

It has now released its final results for the year ended 2015.

Revenues increased across all business units with Investment Management up £5.5M, Channel Islands up £1.6M, Fund & Property Management increasing by £1.1M and Financial Planning revenue up £311K. Staff costs increased by £4.7M, there was a £159K growth in the financial services compensation levy, amortisation was up £496K and other underlying admin costs grew by £1.8M. We then see a £540K gain from the sale of the investment in SHL and a £216K gain from changes in the fair value of deferred consideration offset by a £718K impairment of an available for sale asset relating to the student accommodation fund and a £252K loss from changes in the fair value of other assets which meant that operating profit increased by £1.2M when compared to 2014. There was a £411K increase in the finance cost of deferred consideration and a £757K growth in tax charges, due to last year’s change in rate of tax applicable to deferred tax and less profit made in countries with lower tax rates, which meant that the profit came in at £9.2M, broadly flat year on year with a £95K growth.

When compared to the end point of last year, total assets increased by £11.3M, driven by an £11.2M growth in goodwill, a £2.1M increase in other receivables, a £1.6M increase in prepayments and accrued income, a £1.3M growth in the value of software and a £1.2M increase in cash, partially offset by a £3.8M decline in trade receivables and a £2.2M fall client relationship contracts. Total liabilities also increased during the year due to a £2.6M growth in deferred consideration, an £868K growth in other taxes payable and a £720K increase in trade payables. The end result is a net tangible asset level of £8.9M, a decline of £3.7M year on year.

Before movements in working capital, cash profits increased by £2.7M to £18.3M. There was also a cash inflow from both receivables and payables along with a lower amount of tax paid so the net cash from operations was £18.3M, a growth of £7M year on year. The group then spent £1.6M on property, plant and equipment; £1.9M on intangible assets – presumably software in this case; and £250K on available for sale financial assets. The big expense was the £9.2M spent on deferred consideration relating to £1M to the vendors of JPAM, £5.1M to the vendors of Brooks Macdonald Asset Management and Retirement Services International, £2.4M to the vendors of DPZ and £724K to the vendors of Levitas Investment Management but even after this and £400K invested into the joint venture, there was a free cash flow of £5.4M. This easily covered the dividend pay-out so there was a cash flow for the year of £1.2M and a cash level of £19.3M at the year-end.

The discretionary funds under management rose to over £7.4BN, an increase of over £860M over the year. The investment performance across the group accounted for £218M and net new business accounted for £645M. There are three avenues for growth in the discretionary funds: The Bespoke Portfolio Service (BPS), Managed Portfolio Services (MPS) and Funds. The core offering, the BPS, targets individuals with £200K or more to invest with the service split between the management of pension funds (mostly SIPPs), private portfolios and charities. Pension legislation changes continue to make SIPPs more attractive but at the same time, lifetime caps now restrict the size of individual pension funds. Private portfolios remain a significant area of growth, which is supported by the backdrop of a low interest rate environment, and the group are also seeing growth in their trust remits, most notably offshore.

MPS, which is a discretionary service targeted at those with £20K or more to invest, has three areas of growth. The first two relate to smaller investment clients, both portfolios that the group administers and portfolios that are held on external platforms. In both cases there have been pricing pressures over the last few years that now seem to have plateaued. The third area of growth for MPS is the multi-asset funds which sit within the funds business. The growth of this business, which now has £663M under management, stems from their specialist funds as well as the multi-asset funds within MPS.

In the Channel Islands business there have been some management changes as well as increased collaboration with professional intermediaries overseas. The business is now more integrated into the group and funds under management have grown to £1.16BN.

The profit in the Investment Management business was £15.8M, a growth of £3.5M year on year. Despite considerable changes within the industry and volatility within the financial markets, the group have continued to grow funds under management as described above.

The loss in the Financial Planning business was £68K, an improvement of £41K when compared to last year. This business derives both fee based financial planning to high net worth individuals and employee benefit consultancy to small and medium sized employers throughout the UK and remains a major introducer of new investment management to the group. The division had a mixed year. The consulting business was ahead of expectations but employee benefits proved more challenging than expected, not helped by the changes required to deliver an auto enrol solution to businesses in a profitable manner. During the year there was revenue growth of £200K as the business continued to invest in additional staff and systems, particularly as part of the employment benefits consultancy, resulting in the small loss for the year. The board believes that the business is now positioned to return to profitability next year.

The loss in the Fund & Property Management business was £564K, a deterioration of £462K when compared to 2014. It has been another year of considerable growth for the funds business with total funds under management increasing by 28% to £663M. This growth was achieved both organically through the net new investment in the seven existing funds, as well as by the investment in North Row Capital, which manages the Liquid Property Fund that was launched in February 2014 and has contributed £30M to the total of funds under management. The group also exercised its option to acquire Levitas in the year with funds under management of £89M which has increased to £114M by the end of the year. The funds have broken even during the year and given the current level of funds under management and the projected growth, it is expected to make a net contribution during 2016.

Braemar Estates had a particularly difficult year with assets under administration broadly unchanged at £1.14BN against an increased cost base and the loss of a number of mandates. New business instructions were slower in the first half of the year than expected but this has improved and the benefits of this will be seen in H2 2016. Since the year-end a strategic review of the business had been undertaken resulting in a number of changes to the board of the business which the directors believe will result in an improved performance in the forthcoming year.

The profit in the Channel Islands business was £1.3M, a decline of £1M year on year. During the year both the BMI and BMRSI businesses have undergone significant changes in personnel and integration costs following the acquisition of DPZ and during the year both the CEOs of the two businesses left the group resulting in some one-off costs. Darren Zaman has been appointed as CEO and has led a reorganisation of the structure of the businesses and the services offered, including the initiation of an international MPS and the development of links with professional intermediaries overseas focusing on South Africa, where they have recently obtained regulatory permissions to market their services; the Far East; and the Middle East. With a number of opportunities that are being pursued internationally, the directors believe there will be an improvement in profitability in 2016.

Regulatory costs have been high over the past two years with the required repapering of all clients, the Retail Distribution Review, FATCA etc, but the group believe that these have now stabilised. MiFID II, which will impact in January 2017, however, will bring further business requirements and additional costs. They are sheltered to some degree as they are undertaking a full IT system upgrade, which is due to be completed in Q4 2016. They have built in as many of the known requirements of MiFID II as possible into the system specification to enable them to comply with this new European regulation.

In May 2015, on the expiry of the leases on their offices, the group moved into new head office premises in the West End, giving them further room for expansion but the additional costs of this new property are expected to be around £700K in a full year. In line with the increasing regulatory requirements of the financial services industry generally, they are also investing further in their corporate governance, risk and compliance departments and they have incurred an increase in the levies from the FSCS to £500K from £300K last year.

The group’s available for sale financial assets relate to an interest of 10.88% in Braemar Student Accommodation Fund and 750,000 shares in GLI Finance, an AIM listed company based in the Channel Islands. The Student Accommodation fund is promoted by the group, although trading in the fund is currently suspended. At the year-end, based on the most recent valuation, the fair value of the investment was £782K compared to £1.4M last year which gave rise to an impairment loss of £718K. At the start of the year, the group had an investment of £250K in SHL, an unlisted company based in the Channel Islands. In December 2014, SHL sold its subsidiary company and distributed the proceeds to its shareholders prior to being liquidated. Through this transaction, the group realised a gain of £540K.

In July 2014, the group exercised its option to acquire Levitas Investment Management who is the sponsor of two funds known as TM Levitas A and TM Levitas B, to which the group acts as the investment advisor. The funds were launched in 2012 and aggregate assets under management were £89M. The consideration payable is dependent on the future assets under management in the funds on agreed milestones up to November 2018 with the final payment in November 2020. The maximum consideration payable will be £24M but the fair value of the liability at the acquisition date was measured at £11.3M based on forecasts and included an initial payment of £724K. The transaction generated goodwill of £11.2M and the business generated profit of £118K during the year. In the coming year, some £4.4M is due to be paid in deferred consideration which also includes consideration of JPAM and DPZ.

The group is somewhat susceptible to changes in interest rates but not in the same way that most companies are. A 1% fall in interest rates would reduce pre-tax profit by £190K with a 1% increase having the opposite effect, although a low interest rate tends to push investors away from banks and into the kind of funds the group manages. The main operational risks are regulatory risk which seems to be getting more and more onerous and investment performance risk whereby the company’s reputation may be damaged if their investments perform badly, which doesn’t seem to have happened over the past year at least.

During the year Andrew Shepherd was appointed as deputy CEO having been joint MD of the Asset Management business for the past seven years. Not sure why they need a deputy CEO as the current one is also the founder of the group – perhaps he is looking to take more of a back seat?
Going forward, investment markets remain volatile and this is a headwind for the industry as a whole but new business has been strong in Q1 2016.

At the current share price the shares trade on a PE ratio of 26.1 which falls to 17.6 on next year’s consensus forecast, so these shares are not exactly cheap. After a 17% increase in the dividend this year, the shares have a yield of 1.5% which increases to 2% on next year’s forecast.

On the 26th January the group released an update covering the first half of the year. Discretionary funds for the period rose by 5.52%, reflected across all there businesses, against the WMA balanced index which declined by 0.75%. Portfolios held up well in a period of significant volatility. In terms of discretionary funds under management, new business was ahead of management expectations but profits were affected by the faster than expected pace of conversion from advisory to discretionary in the International business. Although this is positive for the future, it negatively impacted trading income during the period.

The funds business increased its funds under management during the period but very high costs incurred in relation to two of its specialist funds prevented it from moving into profitability as had been expected. At the period-end, discretionary funds under management totalled £7.82BN, an increase of 6.71% over the situation at the end of Q1 compared to the WMA balanced index that rose 3.22% in the quarter. This growth was a combination of performance, responsible for a growth of £278M, and net new business, which came to £214M over the quarter.

The property management business had property assets under administration of £1.127BN, an increase of 1.29% in the quarter and the group now has third party assets under administration of more than £270M compared to £260M at the end of Q1. Overall the CEO sees the performance as being strong despite highly challenging market conditions.

Overall then, this has been a bit of a mixed performance in a difficult market. Profits were broadly flat but net tangible assets declined during the year. The operational cash flow was impressive though, and the group produced plenty of free cash despite large deferred consideration payments. Funds under management improved with the growth coming both from investment performance and new business. The investment management business is where the vast bulk of profits are made and this division improved during the year.

The Financial planning business did improve but remained loss making due to difficulties in the employee benefits product due to the costs of providing an auto enrolment product to clients. The Channel Islands business remained profitable but the income did decline as a result of some management upheaval. The movement of advisory clients to discretionary had the effect of reducing profits in H1 of this year, however. The Property Management business is loss making and losses widened during the year as costs increased and the expected move into profitability in the funds business did not materialise in H1 due to high costs in two specialist funds.

Going forward, it sounds as though the MiFID II proposals will cause the group some extra costs and the new head office also looks as though it will add to expenses. It is also worth keeping an eye on the Braemar Student Accommodation fund which was partly impaired during last year. Overall then, I feel there are a number of issues affecting the group and the conditions in the market are tricky at the moment so I feel a forward PE of 17.6 and yield of 2% don’t fully take account of these risks. I do feel as though this is a quality company but I will keep a watching brief for the moment.