FTSE 100 growth champion Hargreaves Lansdown (LSE: HL) is one of the UK’s best business success stories.
Started in July 1981 by Peter Hargreaves and Stephen Lansdown, the partners originally began trading from one of their bedrooms on a shoestring budget, providing information to customers on unit trusts and giving advice on tax planning. This bedroom enterprise has since grown to become one of the UK’s largest fund management platforms.
Sector leader
Even though the group is still relatively small with assets under management of around £92bn, compared to fund management industry giants such as Legal & General (which became the UK’s first $1trn asset manager last year), the company has revolutionised the asset management space in the UK. It was a pioneer in low-cost online asset management, upending the traditional model, which is based on high commission and annual management charges.
Hargreaves set out to provide the same service as a stuffy City broker at a fraction of the cost. In recent years, the company’s growth has only accelerated. City analysts are expecting the group to report a net profit of £252m, which, if achieved, will mean net profit has grown 70% since 2013. Over the same time frame, according to forecasts, revenues will have increased by around 66%.
And I see no reason why this trend cannot continue. Even though the competition in the low-cost online asset management space is increasing, Hargreaves’s strong brand association among investors should ensure that the enterprise does not lose too much business to other start-ups.
Indeed, according to my research, online investment management company Nutmeg, which claims to be the UK’s largest robo-advisor, (an online investment platform that makes all the investment decisions for investors) has only accumulated assets under management of £1.5bn, with an average account balance of less than £30,000.
Meanwhile, Hargreaves attracted £5.5bn of new business last year, and the company has more than 1m customers, suggesting an average account balance of close to £100,000. The number of customers using its services doubled between 2013 and 2017 and the group’s deal with JP Morgan to acquire £765m from the Wall Street bank, announced today, has only increased its profile in my view.
Buy and forget
Its substantial average account balance, coupled with the rapid growth in the number of customers using the platform, tells me that this business has a substantial competitive advantage over its peers.
With this being the case, I think the stock has all the hallmarks of a great buy-and-forget investment. While I have said in the past that I believe the firm’s profit margins could make it the perfect target for regulators, I think any actions will only be a minor setback for the business and could present a fantastic opportunity to acquire a high-quality company with a sector leading brand at a discount price.
Indeed, the one thing that is stopping me buying the shares today is valuation. At the time of writing, shares in the business are dealing at a forward P/E of 38.8, which makes it one of the most expensive companies in the FTSE 100. That being said, if the group’s rate of growth continues, and regulators do not descend on the business, I think shareholders buying today will be well rewarded over the next 10 or 20 years.
