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Was the FCA’s asset management study a buying opportunity?

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Nick Train

Star fund manager Nick Train says last month’s sell-off of asset managers was a buying opportunity, arguing profitability will not necessarily fall with fees as they face competitive and regulatory pressure.

The Lindsell Train UK Equity fund currently invests in Hargreaves Lansdown, Rathbone and Schroders.

Train says: “We are hoping to invest only in fund management winners, that can use increasing scale to offset fee pressures.”

Schroders and Rathbones have historic operating margins around 30 per cent, while Hargreaves is at 60 per cent, meaning that even a narrowing of margins would mean these companies would be more profitable than the average FTSE company, Train says.

He says: “We think it would take an industry-wide abolition of ad valorum fees to undo our expectation of continued superior economic returns. Therefore we regard June’s sell-off for the stocks as a buying opportunity.”

Last month the FCA released its asset management market study, which called for an all-in fee, restrictions on risk-free box profits, and a requirement for authorised fund managers to appoint a minimum of two independent directors to their boards.

Train says that he expects fees to fall at all the asset managers he holds.

This is a result of the clear competitive and, as reinforced this month, regulatory pressures at work. However, just because fees will fall it does not follow profit margins or even absolute levels of profitability must fall too, or fall commensurately.”

FCA fightback: Will the regulator’s proposals fix asset management?

FCA chief executive Andrew Bailey said in a press conference following the release of the market study that he expected fees to continue their downward trajectory and The Share Centre confirmed this month it was dropping fees in response to regulatory pricing pressure.

But Train has faith the sector will remain profitable for three reasons.

Firstly, he says equity markets “have a tendency to go up”. “Ad valorum fees give fund managers leverage to this tendency and protect margins when costs are rising.”

Secondly, technology change will lead to cost savings, Train says. “We know how ambitious the new CEO of Schroders is to reengineer the business.”

Finally, Train points to economies of scale, saying the fund only invests in “fund management winners” that can use increasing scale to offset fee pressures.

Train adds that previous periods of margin compression in the fund management industry have often been associated with takeovers and mergers.

He says: “I would be surprised if Aberdeen/Standard Life was the last merger in the sector in this phase.”

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