I’ve long been a fan of FTSE 100 asset manager Schroders (LSE: SDRC). Its recently-announced joint venture with Lloyds Bank further consolidates its blue-chip status, and with its shares trading well below their high of a year ago, I see great value in the stock right now. Indeed, I’d be happy to buy a slice of this venerable business at the current price.
On the face of it, Schroders’ FTSE 250 peer Jupiter Fund Management (LSE: JUP) — whose share price is similarly depressed — is arguably even better value, based on its comparative earnings multiple and dividend yield. However, another key valuation measure and a worrying development in recent months lead me to conclude that the mid-cap manager is best avoided.
Earnings and dividends
Founded in 1804, Schroders remains a family-controlled business. It has two share classes: voting (ticker SDR) and non-voting (ticker SDRC). The non-voting shares offer particularly good value, because they typically trade at a discount to the voting shares — currently 2,115p versus 2,714p.
City analysts are forecasting Schroders to post earnings per share (EPS) of 215p when it announces its 2018 results on 7 March. As such, buyers of the voting shares are paying 12.6 times forecast earnings, while buyers of the non-voting shares are paying just 9.8 times. Similarly, a forecast dividend of 113p, gives a prospective yield of 4.2% on the voting shares, but 5.3% on the non-voting shares.
Jupiter is a somewhat younger company, having been founded in 1985 and floated on the stock market in 2010. When it releases its annual results this Friday, City analysts will be looking for EPS of 31.4p and a dividend of 24.3p (consisting of a 15.7p ordinary dividend and an 8.6p special). A current share price of 328.7p represents 10.5 times the forecast earnings, while the prospective dividend yield is 7.4%, including the special.
Assets under management
While both stocks have attractive earnings multiples and dividend yields, I come now to that other valuation measure I mentioned earlier. I’d only consider buying a fund manager when its shares are valued at less than 3% of its assets under management (AUM). I consider this provides a reasonable margin of safety to mitigate falls in the value of assets and fund outflows in the event of a market downturn.
Schroders’ market capitalisation (combining both voting and non-voting shares) is £7.33bn, compared with its AUM of £439bn. As such, the stock is valued at an attractive 1.7% of AUM. By contrast, Jupiter — market cap of £1.47bn and AUM of £42.67bn — is valued at what I consider a pricey 3.4% of AUM.
Short straw
Writing about Jupiter last May, when the shares were trading at 450p, I expressed my concerns about the company’s reliance on its flagship Dynamic and Strategic bond funds (after a 30-year bull run in fixed income) and fund outflows. However, there’s been what I see as another worrying development in recent months.
Despite the fall in the company’s shares over the past year, shrewd hedge funds have lately ramped up their bets that the shares will fall further from here. When I was writing back in May, disclosable short positions in the stock totalled just 1.1%. This had risen to 2.5% by the end of the year, but has really been shooting up in 2019. Currently, 10 institutions hold disclosable short positions totalling 8.4%. The numbers for Schroders are 0% and 0%.
