Record – looking for a dynamic strategy gain

Record is a market-leading currency manager that is reporting good levels of growth and offers a juicy dividend, writes Mark Watson-Mitchell. 

When looking at this company, do not get confused with the way that it represents its business.

However, with its 37 years of experience you can certainly give it a premium rating in its marketplace.

Record (LON:REC) has a market-leading position in the managing of currency for its 72 institutional clients.

And this is where people can get a bit confused. Last Friday morning (17 July) the company declared its first-quarter trading update to the end of June and it showed an 8% growth in its AUME figures.

Its assets under management equivalents (AUME) were up to $63.3bn. That does look to be incredibly impressive for a little company capitalised at just £71m.

But as a currency manager, Record manages only the impact of foreign exchange and not the underlying assets, therefore its “assets under management” are notional rather than real. To distinguish this from the AUM of conventional asset managers, Record uses the concept of assets under management equivalents (AUME).

This independent specialist group has four principal reporting lines.

Its ‘Dynamic Hedging’ line is where Record seeks to eliminate the impact of currency movements on elements of clients’ investment portfolios that are denominated in foreign currencies when these movements are expected to result in an economic loss to the client, but not to do so when they are expected to result in an economic gain.

The ‘Passive Hedging’ service seeks to eliminate fully or partially the economic impact of currency movements on elements of clients’ investment portfolios that are denominated in foreign currencies.

With its ‘Currency for Return’ the company enters into currency contracts for clients with the objective of generating positive returns.

The final part of the group’s offer is classed as ‘Multi-Product’, where the client mandate includes combined hedging and return-seeking objectives.

The company’s clients are institutions, including pension funds, charities, foundations, endowments, and family offices, as well as other fund managers and corporate clients. It operates in the United Kingdom, North America and Continental Europe, including Switzerland.

It may not appear to be massive growth, but in 2018 the group had 60 institutions for whom it operated. The next year that built up to 65, while this year its services are now used by some 72 clients.

And I can see that growing at a faster rate due to the services it offers and as its new ‘Dynamic Macro Strategy Fund’ gathers pace. Launched at the start of this month the strategy will utilise FX, fixed income, equity indices, and commodities in order to create absolute returns which are uncorrelated with traditional assets and other hedge funds.

Furthermore, the group has recently appointed KFC Capital Partner a third-party distributor to expand its US distribution capabilities, so growth can be expected from over there, it is hoped.

The group has some 199m shares in issue, of which chairman Neil Record holds 31.3% of the equity and chief executive Leslie Hill owns 7.82%. Another director Bob Noyen, the chief investment officer, holds 4.70%.

Large holders include Schroder Investments (4.99%), Hargreaves Lansdown Stockbrokers (2.54%), Fidelity Management (2.26%), Hargreaves Lansdown Asset Management (1.67%), FINHUMF (1.58%), Waverton Investment Management (1.53%) and Rowan Dartington (1.51%).

The company’s broker Cenkos Securities is looking for current year revenues to slip £1.5m to £24.1m and pre-tax profits to fall from £8m to £5.4m, while earnings will drop from 3.4p to 2.2p per share.

Those falls are taken into its estimates after allowing for one of the group’s major ‘Passive Hedging’ clients, representing some 15% of Record’s AUME figures, switching from a pure management fee basis over to a performance-based fee structure.

That could actually be more beneficial for the group, but conservatively the broker allows for the fees to have fallen this year and next, when it is going for £25.8m in revenues and £5.8m in adjusted pre-tax profits, worth 2.4p in earnings per share.

The group’s shares, currently trading at around 35p and yielding a predicted healthy 5.2% for this year, appear undervalued.

I consider that a premium rating should be accorded to the company, with 20 times prospective being realistic, which would put them on a target price of 44p.