Brooks Macdonald (LSE: BRK) is one of the UK’s smaller asset management businesses. With a market value of only £256m, it’s a tiddler compared to sector leader St. James’s Place with a market cap of £6bn. However, I believe that it would be a mistake to overlook this business just because of its size.
Beating the market
Brooks has been punching above its weight in recent years. The firm has expanded rapidly, building on its physical presence around the UK to attract high net worth clients to its award-winning offering.
According to a trading update issued by the firm today, discretion funds under management totalled £11.66bn at the end of March, a decrease of 0.7% over the quarter. While the decline is disappointing, it’s mostly due to market volatility during the period. Indeed, according to the update, new business totalled £343m for the quarter. Investment performance, on the other hand, detracted £422m from total funds under management. For some comparison, over the period the MSCI WMA Private Investor Balanced Index — a closely watched benchmark for private investor returns — decreased by 4.5%.
Commenting on these numbers, CEO Caroline Connellan declared that the firm’s performance during the period demonstrated the “value of good active management in difficult markets.”
As Brooks continues to exhibit “good active management” I believe that the company will continue to produce outsized returns for investors.
Over the past decade, the stock has returned 23.8% per annum. At this rate, a £1,000 investment made 10 years ago would be worth £9,500 today. Earnings growth has been the primary driver behind these gains. If the firm hits City growth targets for the next two years, it will have managed to grow earnings per share 100% in just five years.
What’s more, over the past six years, the dividend per share has risen at a compound annual rate of 17.3%, and there’s still plenty of room for payout growth. The distribution is covered 2.3 times by earnings per share.
And despite all of the above, shares in Brooks still look cheap. The stock is currently trading at a forward P/E of 13.8 and supports a yield of 3.1%.
Cash cow
Another small-cap that I believe can produce significant gains for investors is Advanced Medical Solutions (LSE: AMS).
A manufacturer of wound care solutions, Advanced’s growth over the past six years has been nothing short of outstanding. Revenues have doubled over this period, and so has net profit.
But what I really like about this business is its cash generation. Since inception, the group has been a cash cow, and today, the firm has a net cash balance of around £63m, just under 10% of its market capitalisation.
As the business does not require much in capital spending, the company has lots of options regarding what it can do with these funds, including boosting the dividend payout to investors. While the shares only yield 0.4% today, the payout is covered nine times by earnings per share and, according to my figures, the firm has enough cash to maintain its payout for more than 10 years at current rates if profits fall to zero. Management is also “actively reviewing M&A opportunities that will further increase value for shareholders” according to Advanced’s latest full-year results release.
