Polar Capital Holdings' full year revenue fell by 18.4% to £182.9m, reflecting a smaller pool of assets under management (AuM). At the year-end AuM stood at £19.2bn, 13% less than last year. This was driven by fund outflows, negative investment performance and fund closures.
Whilst some staff costs are directly linked to fee income, total operating costs still fell at a slower pace relative to revenue. As such, operating profit declined by 31% to £47.9m.
Polar Capital generated free cash flow of £44.6m, down from £74.1m.
A dividend of 32.0p has been recommended by the Board which would bring the annual total to 46.0p, in line with last year.
The Group sees the outlook as positive "with global inflation abating and the peak interest rate cycle within medium term sight".
The shares were broadly flat following the announcement.
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Our view
Polar Capital's funds under management, from which it derives its management fees, rebounded slightly in early 2023. But given its investment focus, that's not too much of a surprise, with technology stocks recovering year-to-date. The Group has particular expertise in Technology and Healthcare, which account for about 38% and 20% of assets under management (AuM), respectively.
While investment performance can help boost the bottom line, the continuing net cash outflows remain a worry. Investment performance can wax and wane, but retaining and attracting new money will drive the business's long-term health.
It's not all bad news, with some strategies gaining momentum. Recent performance by Polar's investment teams has been impressive. There have been some early signs of a recovery, but it remains to be seen if and when Polar can drive enough institutional investors in its direction to return to net inflows.
Despite the challenges noted, Polar Capital has remained profitable and cash positive at an operational level. The Group isn't standing still and has been diversifying into sustainability focused funds as well as emerging markets mandates, which have been both outperforming their benchmarks and attracting inflows. However, at under 10% these are still a small part of AuM.
We do think that Polar offers something a bit different from the more generic fund managers. That's resulted in a strong showing in a recent industry survey, where it was ranked 1st for Thematic Equity investing. It's not impossible that its specialist investment teams could attract the eye of a bigger player. The difficult market backdrop has seen an uptick in consolidation in the market. But there's no assurance that any bidders will emerge for Polar.
Given the pressure investors are currently feeling, it may be more mainstream asset managers that benefit, rather than specialist managers like Polar, when sentiment does turn. There is also a risk that the outlook for growth stocks deteriorates, given the likelihood of recession in major economies.
The Group's prospective dividend yield of 9.3% is of note. However, market forecasts suggest earnings don't currently cover the dividend. We don't have any immediate concerns about the balance sheet, but if earnings don't recover, there is risk that the dividend is cut or scrapped. As ever, dividends are by no means guaranteed.
Despite the continued pressure on demand for Polar's funds, the price-earnings ratio remains close to the long-term average for now. If AuM remains under pressure though, then we see little reason for investor sentiment to improve.
Polar Capital key facts
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.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. 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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