Brooks Macdonald has now released their interim results for the year ending 2016.

Revenues increased when compared to the first half of last year as a £1.2M decline in International revenue was more than offset by a £1.9M increase in investment management revenue, a £323K growth in fund & property management revenue, and a £118K increase in financial planning revenue. Share based payments declined by £310K and acquisition costs were down £120K but other admin costs increased by £270K. We then see a £174K impairment of available for sale assets reflecting the perceived permanent reduction in value of the shares held in Braemar Student Accommodation and a £400K impairment in the investment in joint ventures as the forecast future cash flows from the partnership are now expected to accumulate slower than originally anticipated meaning it will take longer to realise a cash return on the investment.

In addition there was a £152K positive swing in to a gain in the changes in the fair value of assets to give an operating profit £920K above the first half of 2014. The interest received on bank deposits fell by £8K and there was a £62K increase in the loss from joint ventures relating to North Row Capital but this was offset by a £177K reduction in the finance cost of the deferred consideration and after tax increased by £188K, the profit for the half year came in at £4.4M, a growth of £811K year on year.

When compared to the end point of last year, total assets declined by £3.7M, driven by a £3.8M fall in cash, a £1.1M decrease in acquired client relationships and a £407K decline in the investment in joint ventures relating to the impairment in North Row Capital, partially offset by a £1.5M growth in the value of software and a £464K increase in receivables. Total liabilities also declined during the period due to a £2.5M decrease in payables, a £1.5M fall in deferred consideration and a £505K decline in deferred tax liabilities. The end result is a net tangible asset level of £10M, a growth of £1.1M over the past six months.

Before movements in working capital, cash profits increased by £955K to £8.2M but a cash outflow through a fall in payables in particular along with a £460K growth in taxes paid, meant that the net cash from operations came in at £3.8M, a decline of £2.5M. The group spent £568K on property, plant & equipment; £1.6M on intangible assets and £1.8M in deferred consideration to give a cash outflow of £256K before financing. They also spent £859K on their own shares relating to the Employee Benefit Trust and £2.8M on dividends which meant that the cash outflow for the period was £3.8M and the cash level was £15.4M at the end of the period.

The profit at the Investment Management division was £8.5M, a growth of £1.9M year on year. The business continued to grow its professional connections and now works with over 900 introducing firms who refer new business to the group. The international business continues to gain traction in South Africa from a distribution perspective, managing the assets won out of its offices in the Channel Islands.

The loss at the Financial Planning division was £13K, a fall of £37K when compared to the first half of last year. The division had a satisfactory period but the employee benefits market remains challenging and behind board expectations.

The loss at the Fund and Property Management division was £1.1M, an increase of £604K when compared to the first half of 2015. The funds business continued to gain traction and increase its funds under management, with particular momentum in the Multi-Asset Fund range. The business incurred a loss during the period, however, mainly due to costs and charges incurred in two specialised funds which have not achieved critical mass. The property management business saw a small decline in the value of property assets under administration to £1.13BN.

The profit at the International division was £245K, a decline of £364K year on year. This decline was due to the planned conversion of advisory accounts to discretionary accounts.
Advisory accounts deliver higher short term revenues while discretionary accounts are charged in arrears but at higher overall rates so over the medium term this move should enhance fee income, although there is a short term impact.

There was a continued growth in funds under management for the three core investment businesses. This growth was ahead of the board’s expectations and comprised of £394M of organic new business and £15M related to the portfolio performance during the period. The group’s discretionary funds under management rose to £7.82BN, an increase of 5.52% compared to the WMA index that declined 0.75% over the same period.

The group made progress with its IT upgrade and implementation plan, and has added to the scope of the upgrade to include enhancements and to reflect the latest regulatory requirements. The project remains on course to be completed by the end of 2016. It also includes investment in growing the group’s fund management capabilities while expanding the new business teams both on and offshore.

Of the £12.3M of outstanding consideration, £4.5M becomes due within one year. At the end of last year, there was £510K of provisions relating to the expected levies for the FCA compensation scheme. This levy for the 2016/2017 scheme has been announced but is not yet recognised as a provision – the group gives no clue as to how much it is likely to be.

During the year, share options of £529K were exercised relating to the Employee Benefit Trust. There remains a substantial amount of shares held by the trust, with a total value of £4.4M. As these shares are purchased on the market, there is a material amount of cash spent on this. The performance conditions attached to the Share Option Plan require an increase in the diluted EPS of 2% more than the RPI over the three years starting the year the options are granted – this doesn’t strike me as a particularly ambitious target.

The board have continued to see strong organic growth in the early weeks of the second half of the year although the volatility in markets since the New Year is likely to have impacted the group’s funds under management. The second half will benefit from the year on year growth of funds under management but will be impacted be the continuing planned conversion of advisory to discretionary assets by the international business. Overall, subject to the level of the market, they expect to make further progress for the year as a whole.

After a 20% increase in the interim dividend, the shares are yielding 1.8% which increases to 2% on the full year consensus forecast.

Overall then, this was a decent period for the group. Profits were up, net assets increased and although the operating cash flow fell, with no free cash being generated, this was due to an increase in receivables and fall in payables and cash profits grew year on year. The Investment Management business is the profit maker for the group and it performed well during the period. The Fund Management business struggled, with higher losses due to charges relating to two specialised funds. The Financial Planning business is still loss making due to the challenging employee benefits market, but the performance is slowly improving.

The funds under management increased during the period, mainly due to new business with a very modest increase from the fund performance. It is worth noting the high levels of deferred consideration still outstanding and the volatility in financial markets so far this year is likely to have taken its toll. Despite this, however, the group have seen strong growth so far this year. With a forward yield of 2%, I am not sure this fully rewards shareholders for the risk of further turmoil in the financial markets which will affect the company. I remain on the side lines here.

On the 26th April the group announced that at the end of Q3, discretionary funds under management totalled £8.007BN, an increase of 2.37% compared to the WMA balanced index which increased by 0.72% over the quarter. This was driven by new business, which increased funds by £241K and was offset by a £56M reduction due to performance. The property management business had property assets under administration of £1.132BN, an increase of £5M, and they now have third party assets under administration in excess of £260M, a growth of £15M. The group’s underweight positions in resources and UK fixed income assets caused client portfolios to lag the benchmark after a sustained period of underperformance.

On the 27th April the group announced that directors Richard Spencer and Simon Wombwell were selling a combined 585,000 shares in the group, equal to about 4.3% of the entire share capital. After the sale, Richard will still own 1.7% and Simon will own 0.4%. Richard has agreed to a lock-in arrangement in relation to the balance of his shares and having co-founded the company in 1991 he has decided to diversify his holdings, not the most bullish of moves though nonetheless.

On the 27th July the group released a trading update for the year ending 2016. The second half was stronger than the first and trading for the year as a whole was in line with board expectations. Discretionary funds under management rose to a total of over £8BN, with organic growth of 11.6% over the year. The EU referendum has increased investment volatility and negatively affected client sentiment. In addition they had hoped to launch two new funds in Q4 but both did not occur due to the uncertainties around the Brexit vote.

Over the year discretionary funds under management grew by 12% with the index growing by just 4.6%. Over the last quarter, discretionary FUM rose by 3.7% compared to the index growth of 3.4%. The group’s property management business had property assets under administration of £1.1BN at the year end, a fall of 0.32%. The group now has third party assets under administration of over £270M.

Overall then, this seems to have been a decent performance in difficult circumstances. Whether now is the time to be invested in asset managers, however, is not so certain.