We expect many to be vulnerable and this makes companies’ staff unsettled.
What are the warning signs?
We are particularly wary of companies with a large retail presence because fees are coming down quickly and clients are far less sticky.
We are also conscious of any high levels of dependency.
Where a fund group has a large part of their profits and loss driven by a single team, things can quickly change (as appeared to be the case with Merian). And, where there is a fairly common philosophy, like value, you can also find corporate challenges at times like this (like M&G perhaps).
Another consideration is simply profits and loss. We look at financials and try to estimate peak and trough earnings, based on market movements. Where trough earnings are thin, things can quickly change. Quite a few boutiques fall into this camp unfortunately.
We also look at balance sheet strength to see the extent to which the company is capitalised and what spare capital exists, should things turn.
Finally, we look at track record of management. Do they like to do deals? What did they do in the past? Perhaps Jupiter is an example of this.
M&A activity can be disruptive, from people moving offices and locations, to products being shelved or combined.
Ultimately, these are unsettling times for the underlying fund managers and staff. And that stress finds its way into fund returns, eventually.
Rory Maguire is managing director of Fundhouse
