Brooks MacDonald Group (LSE: BRK) is one of the leading independent investment management firms in the U.K. Providing a wide range of investment and wealth management services to private clients, pension funds, charities, professional intermediaries and trustees. The company operates through four segments: Investment management, financial planning, Funds & Property management and International. Brooks MacDonald Group was founded in 1991, three of the founders are still actively involved today.

1. Vigilant Leadership

QuantitivelyIMG_0428

Qualitatively

Annual bonuses:

  •  Measures – Growth in Pre-tax profit, Growth in Funds Under management (F.U.M), performance against each operating divisions budget.
  • Rewards – Bonuses are made from a pool of Pre-tax profits between 5-15%. Exceptional item gains/losses are usually excluded from the pool.

Long-term Incentive Scheme:

  •  Measures – Minimum growth in diluted Earnings.Per .Share of 2% per annum above the increase in the retail price index (RPI) over 3 year periods.
  • Rewards – 20% of bonuses are made in shares deferred for 3 years under the LTIS.

2. Long-term Prospects

Persistent products

The Investment management service offered by Brooks MacDonald Group has displayed exceptional resilience and strong foundations. Revenue in this division is gained from sourcing new business and from growth in investment value. The competency of the groups staff will ensure this division remains intact in the future.

The Financial planning service provides long-term predictable streams of income, due to the fee based model. Future regulatory changes may impact the amount of new clients in this division, as fund managers are being increasingly forced to be more transparent with “all in” fees to help investors identify the best value for money.

The Funds & Property management service has seen some recent headwinds in the future prospects of the division, due to the uncertainties of Brexit, as plans to open two new funds were halted, which may hinder future income streams.

Finally, the International Investment management service providers geographical diversity for the company, which further extends the revenue run-way beyond one domestic location. However, the conversion of previously non-managed advisory accounts to discretionary accounts has caused some short-term headwinds. Nonetheless, the long-term benefits from this division still support continued growth.

Technological advancements

  1. Digital technologies – Digital technologies has the potential to enhance and redefine relationships with clients and how they make transactions.
  2. Digital communication – Asset Management clients are demanding greater digital communication and ideas that can help them make better investment decisions not just sales pitches. Brooks MacDonald Group continues to invest in IT capabilities to ensure clients have access to a robust and flexible infrastructure and to support organic growth.

Risks

  1. Regulatory risk – The sector in which the group operates is heavily regulated and any breach of regulations could lead to fines or disciplinary action.
  2. People risk –  Operating in a competitive market there is a risk of loss of existing clients due to poor performance or service, a failure to respond to changes in the market place, or the loss of key investment professionals.
  3. Operational risk – There is a risk that the group suffers a loss of business resulting from inadequate or failed internal processes, people and systems.
  4. Investment performance risk – There is a risk that portfolios will not meet their investment objectives which could result in the group suffering loss of business.

Mitigations

  1. The group monitors compliance with existing law and regulations and keeps abreast of future changes to assess the likely business impact.
  2. To minimise this risk, the group continues to invest in its employees and monitors developments in the marketplace in which it operates to ensure that the group continues to offer a wide range of services.
  3. The group employs a comprehensive risk-management framework, which comprises ongoing monitoring and reporting of operational areas by first-line and second-line controls.
  4. Portfolio performance, valuations and risk profiles are monitored by management, allowing issues to be identified and mitigated as they arise.

3. Stable and Understandable Business Economics

StabilityIMG_0433

Understandable Business Economics

Industry

Industry revenue predominately originates from management fees (a percentage of the assets/funds under management). The industry is expected to grow at 5.5% compounded annually over the next 10 years. Previous years growth has been supported by historically low interest rates and significant quantitive easing. The Industry is now mature due to consolidation of firms and increasing globalisation. New regulatory changes apace within the industry. Most recently, a major focus is on MiFID II, which has been postponed until 2018, will see substantial changes around transaction and client reporting.

Rank in Industry

Brooks MacDonald Group manages £ 8.3 Billion Funds Under Management (2016), making the firm one of the leading private client investment managers by size.

Operating Segments

1. Investment management      2. Financial Planning/consulting     3. Funds & Property management      4. International

IMG_0434

Competitive advantages (MOATS)

  1. Strong and predictable free cash flow, with no debt
  2. Leading private client investment managers
  3. Highly competent and dedicated staff (including founders)
  4. High profitability (Net profit margin)
  5. Existing distribution and sales networks

Barriers to entry

* Robust governance structures     *  High human capital retention     * Entrenched fee structures      * High regulation requirements     * High initiation & administrative cost

Brexit Implications

Brooks MacDonald Group was forced to postpone the launch of two new property related funds due to macroeconomic uncertainties.

Investment returns have become more challenging with investor sentiments wreaking around the future outlook for the U.K. Economy.

Brexit Mitigations

Despite of such challenges posed by Brexit, Brooks MacDonald has remained consistent in growth across the entire business to date, displaying the resilience of the workforce.

Furthermore, during the 2008 financial crisis, Brooks MacDonald Group grew F.U.M by 29%, revenue 23% and net income 50%.

Therefore the company may not be completely immune to external economic and political influences, it produced strong performance and is inherent in the nature.

F.U.M, Revenue & Net income

IMG_0438Funds under management, revenue and net income has begun to slow down in growth over the last 5 years compared with the last 10 years, however the growth is still prominent and the level of consistency in operational performance has been outstanding.

Substantial shareholdings (owners)

IMG_0439

Morningstar

Brooks MacDonald Annual Reports

  •  Approximately 17.27% of shares are not in public hands. (Private owners)

Growth strategies

  1. Working with more quality professional advisors
  2. Strategic alliances with new firms
  3. Increase regional offices and recruiting of high quality
  4. Enhance and expand range of services offered to clients
  5. Continue the development of the brand image
  6. Re-investment in IT, distribution, marketing and staff training
  7. Growth in pension funds and ISA portfolios

4. Valuation

From computing a discounted future free cash flow model, a earnings power model and a book value growth model for Brooks MacDonald Group, using a 15% future growth rate and 10% discount rate to today’s present value, to be conservatively Intrinsically valued between £ 17 – £ 20 per share, equating to a total public market value of £ 238 Million – £ 280 Million. 

*At current market prices, the company can be classified as being fairly valued. An approximate 20-30% discount to the current price (£ 14 – £ 16 per share) would be required to justify a really good price for this wonderfully run operation.

5. Summary

Brooks MacDonald Group is well positioned strategically, has a consistently strong balance sheet, a growing brand, high quality staff and working with an increasing number of professional intermediaries. Although historic performance provides great confidence  in the success of the business model, the surrounding economic and regulatory uncertainties regarding Brexit will of course cast shadows over the future of many U.K. financial firms including Brooks MacDonald Group.

Thank you for reading,

Jordonlee W. Smith

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s