Man Group (LSE: EMG) is the world’s largest publically-traded hedge fund which, in my opinion, makes it one of the FTSE 250’s more exotic constituents.
Recurring income
Man has two primary revenue streams. Firstly, annual management fees charged based on the value of assets under management. Second, performance fees, which are only charged when the firm’s investment funds produce a certain level of performance.
Unfortunately, due to market volatility, City analysts believe these performance fees, which make up around 25% of revenue, are likely to come in below target this year. As a result, analysts are forecasting a 14% decline in earnings per share (EPS) for 2018, as some of the decline in performance fees will be offset by higher management fee income. A few weeks ago, the company reported that assets under management had risen to a record $114bn, thanks to a surge of inflows.
Still, even though profits are set to decline, I’m attracted to this company because the shares are changing hands for just 11.7 times forward earnings, and a dividend yield of 6.3% is on offer. On top of the dividend yield, the group is also buying back stock. Including the buyback cash return, the total shareholder yield is just under 7%, according to market data provider Morningstar. This hefty cash return is enough to convince me that Man could be the perfect stock to hold instead of a cash ISA.
Unloved newbie
Another income play you might want to consider is Quilter (LSE: QLT). It’s only been a public company for a few months, and was formerly Old Mutual Wealth Management Ltd, attached to the Old Mutual group.
It might be untested as a public entity, but it certainly seems to have what clients want. Today, Quilter reported a net client cash flow of £1.1bn for the third quarter of 2018, and £4.1bn year-to-date, an increase of 5% on opening assets under administration. Even though third quarter flows were down slightly year-on-year, I still rate this as a positive performance, particularly as peers such as Hargreaves Lansdown have recently warned that it’s getting tough to attract new clients in the current market environment.
Unlike so many other IPOs, Quilter came to the market with a relatively modest valuation. Based on growth estimates, the stock is trading at a forward P/E of just 10.7 for 2018. Analysts are also expecting management to announce a dividend yield of around 5p per share (around 50% of EPS), giving a dividend yield of 4.3% in the near term.
Usually, I tend to stay away from companies that have just hit the market. With Quilter, however, I’m willing to make an exception, because it’s already made a name for itself with £118bn of assets under administration.
As the company builds a reputation as an independent entity over the next few years, I think there could be healthy returns on offer for investors.
