As an American who invests with Vanguard and can’t say enough good things about the company’s role in lowering fees across the industry, I was thrilled when it announced this week that for the first time it will open its platform directly to UK investors.
Unsurprisingly, the news that the king of cheap investing was entering the market sent the share price of the UK’s largest retailer broker, Hargreaves Lansdown (LSE: HL), down around 5% over the course of the week. But does aggressive new competition mark the end of the long growth story for Hargreaves?
Well, it appears almost certain that a price war will break out sooner rather than later. Vanguard is now offering investors a limited range of ISAs with an annual fee of 0.15% capped at £375 per year, while Hargreave’s own ISAs charge an administration fee of 0.45% per year on assets up to £250,000. Together with the fact that Vanguard’s average fund charges only 0.14% annually, this certainly suggests that most investors looking to passively invest would be better off with Vanguard.
In the short term, HL is somewhat protected as it still offers a broader range of accounts than Vanguard and also offers access to other manager’s funds. That said, Vanguard’s history in the US suggests it will aggressively roll out new funds and account types and progressively lower fees as its AUM snowballs.
For HL and other brokers this will likely end with lower margins as they are forced to cut fees in order to compete with non-profit Vanguard. With operating margins for the six months to December an astounding 70.6%, this won’t be a life or death situation for HL for the time being, but it’s certainly not to be welcomed.
However, with the company’s shares priced very highly at 31 times forward earnings any downward pressure on margins and growth could be hugely detrimental to the company’s lofty valuation. HL remains a highly profitable, diversified business but increasing competition and a very high valuation are enough for me to balk at buying the company’s shares today.
A safer growth dividend option?
A more attractively priced financial stock is corporate stockbroker Numis (LSE: NUM), whose shares trade at just 13 times forward earnings while offering a 4.35% dividend yield that is covered 1.95 times by earnings.
The firm has been growing at a steady clip by focusing on consolidating its position as the go-to broker for small and mid-cap companies seeking to raise funds. Even though IPO markets were quiet last year, this approach paid off as revenue increased 15% year-on-year to £112m and pre-tax profits leapt a full 25% to £32.5m.
This performance was due to the company’s diversified approach to business that encompasses everything from M&A advisory to primary and secondary fund raising, research and trading that continues to win new clients and maintain existing ones.
Also attractive is the fact that the business is highly profitable, with operating margins creeping up to 28.9% last year. And while the company’s fortunes are tied to the optimism of its clients’ willingness to raise funds or undertake M&A, Numis’s healthy balance sheet has £129m in net cash, which provides significant downside protection should market confidence plummet. With impressive market share growth, high margins, a bumper dividend and plenty of cash Numis looks to me an attractively priced share for the long run.
