Most financial stocks have rebounded strongly from last year’s market crash. They include asset managers Jupiter Fund Management (LSE: JUP), Liontrust Asset Management (LSE: LIO) and Polar Capital Holdings (LSE: POLR).
Here, I’ll explain why owning shares in asset management companies can deliver above-market returns. I’ll also discuss the current valuations of these three stocks and reveal which one I’d buy today.
Turbocharged performance
In theory, asset managers like Jupiter, Liontrust and Polar are geared plays on the stock market. This is because their revenues come from levying a charge on their assets under management (AUM). As stock markets tend to rise over the long term, the value of managers’ AUM should rise, increasing their revenues with no extra effort or costs. Furthermore, successful companies also earn performance fees and attract inflows of new money into their funds.
One of the risks for investors in asset managers is falling stock markets. At such times, the aforementioned turbochargers of their profits go into reverse. And inevitably their share prices too. For this reason, I think it’s particularly important to look for a good margin of safety in the valuations of asset managers.
How I value these financial stocks
A good while ago, I picked up a tip on valuing asset management companies from Nick Train (a.k.a. Britain’s Warren Buffett). Invest only when the stock is valued at less than 3% of AUM. Over the years, I’ve found this a useful rule of thumb.
I wrote about Jupiter, Liontrust and Polar (in separate articles) back in the summer of 2018. The table below draws together their valuations at the time.
|
2018 |
Share price (p) |
Market cap (£bn) |
AUM (£bn) |
Market cap/AUM (%) |
|
Jupiter |
453 |
2.07 |
46.9 |
4.4 |
|
Liontrust |
605 |
0.31 |
11.3 |
2.7 |
|
Polar |
700 |
0.65 |
13.4 |
4.9 |
As you can see, based on the 3% rule, Liontrust at 2.7% was the only one of the three stocks I considered buyable. Jupiter and Polar, at 4.4% and 4.9% respectively, were far too highly valued for me. Let’s fast-forward to today.
All change
Much has changed in the financials of the three stocks, as you can see in the table below.
|
2021 |
Share price (p) |
Market cap (£bn) |
AUM (£bn) |
Market cap/AUM (%) |
|
Jupiter |
286 |
1.58 |
58.8 |
2.7 |
|
Liontrust |
1,864 |
1.14 |
33.3 |
3.4 |
|
Polar |
862 |
0.86 |
22.7 |
3.8 |
The shares of Liontrust, my ‘buy’ stock of 2018, have risen 208% from 605p to 1,864p. This has been helped by the market rerating the stock from the ‘cheap’ 2.7% of AUM in 2018 to 3.4% today.
Polar’s shares have advanced a more modest 23% from 700p to 862p. Its gains were constrained by the market derating the stock from the ‘pricey’ 4.9% of AUM in 2018 to 3.8% today.
Finally, the Jupiter share price is down 37% over the three years from 453p to 286p. Again, its performance was negatively impacted by a market de-rating. In this instance, from a ‘pricey’ 4.4% of AUM in 2018 to just 2.7% now.
How I see these financial stocks today
Jupiter is the only stock currently valued at less than 3% of AUM. It’s on the same 2.7% rating as Liontrust was in 2018. As such, Jupiter looks very buyable to me today. Certainly there’s the aforementioned risk that AUM and the share price could drop significantly in a falling stock market. But hopefully, the low valuation mitigates that.
The valuations of the two highest-rated stocks today — Liontrust at 3.4% and Polar at 3.8% — are much less extreme than the two highest of 2018 (4.4% and 4.9%). If I owned Liontrust and Polar, I’d be inclined to hold at sub-4% of AUM.