Assets under management (AuM) at Polar Capital rose 16% to £24.3bn in the nine months to 31 December. This was largely driven by positive market movements and fund performance.
Net inflows for the period were £0.8bn, compared to £1.5bn last year.
Profits from performance fees were substantially lower at £4.3m, compared to £19.3m during the same period last year.
The shares fell 1.3% following the announcement.
Polar Capital is a fund management group listed on the Alternative Investment Market. As of the end of December 2021 the group had £24.3bn of assets under management (AuM) across 32 funds and 3 investment trusts. That puts it at the smaller end of the market.
Normally we'd say asset management is an industry where size really matters. However, Polar Capital has healthy operating profit margins of around 35% because of its focus on "thematic investing". Its funds are specialists, looking to capitalise on broad trends within the wider economy and are able to charge higher fees.
The group has particular expertise in Technology and Healthcare, which account for 49% and 14% of AuM respectively. That has served it well in recent years. Not only has tech as a sector performed well, but Polar's funds have also outperformed though remember past performance is not a guide to the future.
We see Polar Capital as a way to participate in the tech boom, while reducing some of the stock-specific risks. On the other hand, investing in asset managers rather than the funds themselves is a leveraged play on asset price growth.
Rising interest in technology funds coupled with rising share prices does wonders for AuM. Fees are charged as a percentage of AuM and fixed administrative costs mean revenue growth feeds quickly through to higher profits. Cash conversion is strong and a large proportion of this is paid back out to shareholders with a prospective dividend yield of 6.5% - although remember that this isn't guaranteed.
There are risks to this approach though. The virtuous circle of rising share prices and increasing inflows can quickly reverse. Polar's heavy reliance on the technology sector means a change of sentiment would be very painful. Rising interest rates are also bad news, and with speculation for another hike building, there could be bumps in the road.
To mitigate this risk, management's been snapping up smaller boutique investment managers with expertise in other areas like value investing. Meanwhile a sizeable proportion of the group's cost is made up of performance related pay for fund managers - providing some flexibility in bad times. Nonetheless a chill in the tech sector and prolonged underperformance are both real risks and shouldn't be underestimated.
With a price-to-earnings ratio some way below the long-term average, the market has priced in these risks. While a further sell-off in the tech sector could see Polar struggle, we think the group is well-placed among peers to profit from an improvement in the market.
Polar Capital key facts
- Price/Earnings ratio: 10.6
- 10-Year Average Price/Earnings ratio: 13.7
- Prospective dividend yield (next 12 months): 6.5%
All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.
Net inflows in the third quarter were £117m, bringing the total so far this year to £0.8bn. This reflected inflows across all the group's offerings, with Segregated Mandates, which are funds run exclusively for a particular client, receiving over half of the new subscriptions.
Net inflows continued at a similar pace to the third quarter in the first two weeks of January.
More than £300m in inflows went to sustainable Emerging Market stars strategies and sustainable Smart Energy and Smart Mobility strategies. Alternative strategies now make up £1bn of AuM.
88% of AuM outperformed their benchmarks since inception.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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