Brexit slaps Rathbones with £15m hit as old offices sit empty

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Softening demand for London property has delivered Rathbones a £15m cost in H1 as its former Mayfair offices remain empty following its move to the City in February.

The hit, detailed in its latest results, comes as asset manager profits come under the spotlight in the face of regulatory pressure, although Rathbones’ reveals it has still achieved its 30 per cent operating margin target.

The results included an announcement that Rathbones would absorb research payments currently charged to funds when Mifid II comes into effect on 1 January 2018. In H1 this cost totalled £500,000. An FCA ban on box profits would also deliver a hit.

For H1, underlying profits before tax increased 22.7 per cent to £43.3m compared to £35.3m in 2016, while its profit margin was 30.4 per cent compared to 29.4 per cent last year.

Funds under management totalled £36.6bn.

Chief executive Philip Howell describes the firm’s former offices at Curzon Street in Mayfair as a “good address” but says they have been unable to sublet the building.

“It is currently empty and we’ve booked a hit just south of £15m for the half year,” Howell says, noting he would not have expected costs that high before the UK’s vote to leave the European Union.

“The sentiment post Brexit has been muted to say the least. I don’t think it’s a particular geographical issue, it’s probably a London-wide issue.”

The private client business cushions Rathbones from the full impact of the FCA study and recent regulatory changes, says Howell, noting its total funds under management are £32bn compared to £4.6bn in the unit trust business.

“Research costs in the main business have been borne by the company for many, many years. The main impact of the FCA study will be on box profits.”

Its unit trust business earned £1.8m from box profits, which the FCA is moving to ban, as outlined in its asset management market study.

“We will manage through continued growth, which is something we’re pressing hard for, or variable remuneration will bear some of the cost of that because we have profit-based remuneration.”

Howell says the overall profit margin for the unit trust business is around 32 per cent. “Like any business we’ll be looking to grow our way out of any detrimental margin impact.”

On the managed portfolio service launched in March, finance director Paul Stockton says they are anticipating “low, low double digits intake”. It has attracted £7.2m in its three months since launch.

“Other firms are providing MPS solutions as their primary product for the IFA at a lower margin. Whereas we’re providing full DFM at normal margins for our clients. This just sweeps up those that are lower value.”

The six-fund execution-only managed portfolio service launched for David Coombs invests in in-house funds with Cautious, Balanced, Income, Balanced Plus, Equity and Equity Plus strategies.

At the other end of the spectrum, Rathbones partnered with Credit Suisse on a private office offering for “super high net worth” individuals and family offices, which launched in January.

Howell says it is “early days” for both propositions and difficult to speculate on their contribution to the business for the remainder of the financial year.

Howell notes that many private clients are drawing on their portfolios in the low interest rate environment, either for buying houses for themselves or their families or to use cash to maintain their living standards.

“Even though we’re seeing those outflows, 75 per cent are on accounts where the client remains with us. They’re not outflows where the client is leaving us,” Howell points out.

In the unit trust business, Howell says the trend towards passives and absolute return funds has resulted in some outflows for Rathbones. “But inflows have more than offset outflows and that’s still a business with a lot of momentum.”

Howell says the unit trust business had £800m under management when he joined Rathbones in 2008 and is nearing its goal to reach £5bn.

“There’s plenty of room to grow with a disciplined investment process and to nail some good sales momentum. It’s an important part of Rathbones as it helps a number of other activities around the group, including sharing investment process and research.”