AJ Bell: An IPO worth getting ready for

AJ Bell: An IPO worth getting ready for

Private investors have a tough time when it comes to initial public offerings (IPOs). Researching new issues can be problematic and the public isn’t always able to buy in at the IPO. The upcoming IPO of investment platform AJ Bell should be accessible and the company appears to have attractive prospects.

To access AJ Bell’s IPO you need to be both a UK resident and an AJ Bell client by 15 October. The IPO prospectus is due to be published at the end of November and the IPO is expected to take place within the next six months.

To me, it is worth signing up as an AJ Bell customer in order to qualify for shares in the IPO. Using AJ Bell’s services will also provide an insight into its quality and the company’s competitive position.

AJ Bell does reserve the right to impose “eligibility criteria” with regard to participating in the IPO. This might prioritize long-standing clients or those clients who have high value accounts with the group.

The only downside to opening an AJ Bell account, as far as I can see, is the time involved. If you have over £4,000 in an AJ Bell account you also get access to Shares Magazine for free (the magazine costs £125 a year to subscribe).

AJ Bell’s corporate backdrop

As the name suggests, AJ Bell is a founder run business and, according to staff feedback, is one of the top 100 workplaces in the UK. Happy staff at AJ Bell should translate into good customer service and happy customers.

AJ Bell reviews on Feefo

Source: Feefo.

The group recently moved to an award-winning new head office in Exchange Quay, Manchester. AJ Bell CEO Andy Bell describes the new office as providing “space to facilitate our ambitious growth plans.”

AJ Bell is one of the leading investment platforms in the UK with 183,482 customers at March 2018. This compares to 1,091,000 customers at market leader Hargreaves Lansdown (HL.) at June 2018.

Russ Mould is the media face of AJ Bell

Source: YouTube.

AJ Bell’s customer offering

In 2017 AJ Bell launched a number of own-brand funds that have been built using ETFs. This makes them low cost and they should appeal to DIY investors who don’t want to pick higher cost active funds.

The AJ Bell Passive Global Growth Fund (0.5% fee) aims for long-term capital growth and is exposed to “high risk assets.” The fund’s emphasis on marketing-driven themes, like emerging markets and automation, makes me wary.

The group also offers five lower risk funds and should therefore be able to cater to most investors. The AJ Bell Passive Cautious Fund, the lowest risk offering, has a 60% allocation towards fixed income and also charges 0.5%.

I am not convinced on the merits of these funds, as they will still attract AJ Bell’s platform fees. A passive ETF from the likes of Vanguard will not attract platform fees and the ongoing charge can be as low as 0.07%.

AJ Bell Passive Global Growth: ongoing charge is 0.5%

Source: AJ Bell.

Another area of differentiation is the platform fee that AJ Bell charges versus industry leader Hargreaves Lansdown. AJ Bell charges 0.25% for the first £250k in open-end funds versus 0.45% charged by Hargreaves Lansdown.

If you have £1 million in an open-ended fund with HL the platform fee will be £3,000 versus £1,375k with AJ Bell. AJ Bell’s platform fee comparison service highlights its fees only in relation to HL and doesn’t mention other providers.

Current platform fees for open-ended funds

Source: AJ Bell and Hargreaves Lansdown

Performance: AJ Bell versus Hargreaves Lansdown

Hargreaves Lansdown (HL) generates an operating profit margin of around 65% versus 32% for AJ Bell. The higher platform fees for Hargreaves Lansdown are the key driver for its much higher profit margin.

Hargreaves Lansdown still increased its customer base by 137,000 in the year to June 2018. This compares to the 24,000 new customers that AJ Bell attracted in the year to September 2017

It appears odd that AJ Bell is growing at a slower pace than HL given that it offers lower platform fees. There are a number of possible explanations for this apparent paradox.

Platform charges for £1m in an open-end fund

Source: AJ Bell.

Hargreaves Lansdown’s competitive advantages

A) Brand leadership

AJ Bell’s client retention rate at 95.1% is currently slightly higher than HL at 94.3%. However, HL continues to have a strong reputation with its Net Promoter Score (NPS) recently coming in at 50.3 (the NPS ranges from -100 to +100).

The financial services sector has a poor reputation in general with banks viewed in a particularly poor light. A number of investment platforms have also recently had service issues i.e. Barclays Stockbrokers and Interactive Investor.

Against this backdrop the reputation of a financial service groups may be more important than the fees it charges. Hargreaves Lansdown is the largest investment platform in the UK and has a well-established consumer brand.

Implied preferences for price and non-price attributes: the importance of the brand

Source: FCA Investment Platforms market study interim report (September 2018)

B) Fee discount on some popular funds

Hargreaves Lansdown is able to use its buying power to negotiate fee discounts on a number of popular funds. The Lindsell Train Global Equity Fund has an ongoing cost of 0.74% in AJ Bell but with HL it is 0.54%.

This is a key advantage that Hargreaves Lansdown has over smaller rivals like AJ Bell. However, many popular funds aren’t any cheaper on Hargreaves Lansdown with Fundsmith Equity Fund a notable example.

In principal, fund platforms are just distributors and so customers should be price sensitive. In reality fund platforms help users to navigate complex issues such as tax, fund selection and pension planning.

C) Fund selection tools and services

Hargreaves Lansdown has been particularly successful in helping DIY investors pick funds. The group also offers a range of services like the Wealth 150, HL Select Funds and HL Multi-Manager funds.

This shouldn’t make a difference to the platform choice given that bulk of HL fund information can be accessed for free. In reality it does make a difference with DIY investors preferring to deal with one platform.

AJ Bell’s Ryan Hughes runs a Favourite Funds list that covers active and passive funds. In my view, AJ Bell’s active fund analysis tools aren’t nearly as comprehensive or as user friendly as Hargreaves Lansdown’s tools.

If you look at a fund on Hargreaves Lansdown’s website it offers a number of different sections i.e. fund analysis, costs, research. AJ Bell’s website simply takes you to an underwhelming one page “AJ Bell report” (PDF) on a fund.

Hargreaves Lansdown’s excellent website has helped make it a market leader

Source: Hargreaves Lansdown.

Are AJ Bell’s financial numbers attractive?

AJ Bell has annual reports stretching back to 2009 on its website. The latest interim accounts are for the period to March 2018. 

It is particularly impressive that AJ Bell grew strongly throughout the global financial crisis. Assets under administration more than doubled from 2007 to 2009 with an increase from £5bn to £11.2bn.

Assets under administration (AUA) came in at £40bn at September 2017 and hit £42bn at March 2018. Revenue in the financial year to September 2017 came in at £75.6m and profit before tax hit £21.7m.

AJ Bell continued to grow in 2008 and 2009

Source: AJ Bell.

Recent business momentum

AJ Bell identifies two key business performance drivers: 1) Customer numbers and 2) Assets under administration (AUA). Customer numbers clearly are a key driver for AUA along with general equity market trends.

Customer numbers increased 12% from September 2017 to March 2018 while AUA increased 5%. The customer retention rate was 95.1%, up from 94.7% in the same period a year ago.

AJ Bell’s recent performance

Source: AJ Bell.

Revenue in the six-month period was up 16% on a year ago and profit before tax increased by 24%. AJ Bell generated an impressive operating profit margin of 32% in the period, up from 30.4% a year ago.

The business is capital light with non-current assets (excluding goodwill) of £7.6m at March 2018. AJ Bell had £45.3m of cash and cash equivalents at March 2018 and net working capital (excluding cash) came in at £9.8m.

Market share

The July 2018 interim FCA report on the platform sector notes that one group has a 40% market share of the direct to consumer (D2C) market.  It is clear that the unnamed firm is Hargreaves Lansdown.

An earlier FCA report on the sector gave a breakdown of the Assets Under Administration (AUA) of the largest non-advised platforms in the UK.  This highlighted that AJ Bell is a relatively small player and therefore has scope to take market share.

AUA (£bn) held by non-advised platforms in 2011 and 2016

Source: FCA Market Study July 2017.

AJ Bell is differentiated from Hargreaves Lansdown by its exposure to the advised platform market.  This is a segment where advisors use platforms to manage investments for their clients and is also seeing strong growth.

AUA (£bn) held by advised platforms in 2011 and 2016

Source: FCA Market Study July 2017.

Market growth

Assets under administration (AUA) across fund platforms have been seeing strong growth on both the Advisor and the Director to Consumer (D2C) side.  AJ Bell caters to both areas with it allowing advisors to use its platform.

AUA on platforms 2013 to 2017

Source: FCA Investment Platforms market study interim report (September 2018).

The FCA has published its interim report on the platform market and will publish its final report (link) in the first quarter of 2019.  The report highlights the growth of model portfolios offered by platforms and this should be an attractive opportunity for AJ Bell.

It is also clear that many DIY investors are willing to do their own research into funds.  This may provide an opportunity for AJ Bell to take market share if it can maintain the platform fee differential with Hargreaves Lansdown.

How DIY investors choose investments

Source: FCA Investment Platforms market study interim report (September 2018).

Potential risks

Hargreaves Lansdown is a formidable competitor and could slash its fee structure if customers started leaving in droves. The group would then offer customers low fees and discounts on funds that other platforms cannot match.

An additional risk is that Brexit could destabilize the UK economy and hit the share price of AJ Bell. Hargreaves Lansdown, for example, started trading at 210p in May 2017 but the shares fell to only 132p in July 2008.

Summary

AJ Bell’s IPO will serve to increase the group’s visibility and this may help in attracting new customers. When looking for a savings platform one of the first things that people focus on is the profile and financial strength of the business.

As a listed company AJ Bell will be closely scrutinised by investors and is likely to maintain a healthy cash position. The former editor of Shares Magazine, Russ Mould, is also now gaining traction as the media face of AJ Bell.

While AJ Bell is much smaller than Hargreaves Lansdown there is no reason why the group cannot prosper. This has been the case to date and the underlying UK savings market is also expected to see further growth.

Against this backdrop it should be worth opening an account with AJ Bell in order to qualify for shares in the IPO. Hargreaves Lansdown’s 2007 IPO helped increase the profile of the business and it has prospered since then.

 

At the time of publication, the author does not hold a position in AJ Bell but may subscribe for shares in the IPO.

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  • comment-avatar

    Further thoughts:

    AJ Bell fee versus HL fees –

    Looking further at this and I quite like the AJ Bell structure versus HL. I think of it as one having a restaurant discount card while the other doesn’t. It is great to have the discount card but you may choose restaurants you don’t want to go to because of the discount. So for HL you may choose funds where it has negotiated a lower fee. But these may not be the best funds.

    In reality a 0.2% platform differential between AJ Bell and HL is probably not going to be significant in the decision making process for most people. It works out at £200 per £100k on a platform. This is not important versus the question of whether one of the platforms is better at helping you pick funds than the other. That could generate a difference of 1%-6% in terms of someone’s investment return from investing in funds.

    AJ Bell’s passive fund of funds –

    On reflection, I was probably a bit harsh on AJ Bell’s passive fund portfolio in my article on them. In principal I think these are a really good idea. It means you open an account and you have effectively one decision to make i.e. which risk profile to go for. I think if they could simplify the underlying holdings and get the fee down to 0.25% then they would be fantastic. Then the total fee including the platform charge would be only 0.5%.

    For AJ Bell’s passive growth fund, for example, I could probably just have exposure to very low cost ETFs. The Vanguard FTSE 250 costs 0.1% and the S&P 500 ETF costs 0.07%. I wouldn’t have emerging markets myself or “trendy themes” like Automation etc. The growth would then be driven by Western Equities and in particular small and medium-sized companies. If they did this they should easily be able to get the charge on the fund down to 0.25%. The current charge of 0.5% (including the underlying fund charges) for a collection of passive ETFs seems a bit high to me.

    But I like the idea that AJ Bell is promoting low cost passive funds when other platforms appear to focus on promoting mainly higher cost active funds. AJ Bell’s own fund of passive funds are essentially Robo-advisor type funds because Robo-advisors put investors into a basket of passive funds. The alternative approach from another platform to have a multi-manager fund of active funds can be very costly. So all credit to AJ Bell for building a portfolio of passive funds and making it easy to invest in them.

  • comment-avatar

    DIY platforms set to attract £100bn over the next five years. I also posted in the HL article.

    http://www.diyinvestor.net/diy-investing-platforms-set-to-attract-100bn-over-next-five-years/

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