Volatile markets hurt Brewin profits

Underlying profits at Brewin Dolphin slipped in the six months to March as commission income fell amid volatile markets, but the wealth manager said its margins would be boosted by inflows into its discretionary funds.

Jamie Matheson, executive chairman, said that the company had carried out a “flight to quality” in its asset allocation over the past year in response to market turbulence, with no plans to change this stance given uncertainty persists.

The cautious approach by Brewin’s discretionary fund managers – as well as a defensive stance from advised clients – depressed its dealing volumes in the period, reducing commission revenue. This contributed to a 17.1 per cent fall in profit before tax to £18.9m; stripping out the impact of one-off events including redundancies and last year’s £6m payout to the Financial Services Compensation Scheme. Statutory pre-tax profit rose 3.3 per cent to £12.3m.

Mr Matheson did not add to recent criticism of the funding structure of the FSCS, saying that the financial industry and its regulators “should concentrate on avoiding the sort of scenario that results in the FSCS having to make these payouts, because then there’s less reputational damage done to the City as a whole”.

Brewin’s funds under management increased 3 per cent to £25.7bn year-on-year, although it suffered net outflows of about £100m between September and March. This was a result of net outflows of £400m from Brewin’s advisory funds, which cancelled out net inflows of £300m into its discretionary funds.

The company said it had identified a candidate to replace Robin Bayford, who will step down as finance director at the end of this year. His replacement, whom Brewin did not name, is awaiting approval from the Financial Services Authority. Brewin’s revenue fell 1 per cent to £131.4m, while diluted earnings per share were unchanged at 3.5p.

Mr Matheson said that the group would continue to concentrate on increasing the proportion of client assets managed on a discretionary basis, which are more profitable for the company, and now account for two-thirds of managed funds. However, he said that advisory fund management would remain an important part of Brewin’s offering, arguing that “certain business must by its very nature remain advisory”.

Improvements to Brewin’s IT systems would result in annual savings of about £11m when completed within the next two years, Mr Matheson added.

Peter Lenardos, an analyst at RBC Capital Markets, said he saw the potential for “substantial uplift” in Brewin’s operating margin, as it shifted further towards discretionary fund management, which allow investment professionals to service a larger number of clients. Brewin’s pre-tax profit margin was 10 per cent in the period, compared with 27 per cent at Rathbone Brothers, which has more than 90 per cent of client assets under discretionary management.

The interim dividend was maintained at 3.55p per share. The shares rose 0.5 per cent to 143.8p

FT Comment: At 10 times next year’s forecast earnings, Brewin Dolphin trades at a discount to peers such as Rathbones and Brooks Macdonald, which are at 13 and 17 respectively. This is mainly because Brewin – with its large volume of lower-margin advisory funds, and network of 40 regional offices – has been unable to come close to the operating margins achieved by those rivals. Brewin’s performance will be boosted by IT upgrades and its growing discretionary business. But Brewin’s discount to Rathbones looks narrow enough to ensure that prudent investors in the sector will continue to plump for the latter company.