Poised for growth

SAID IT WILL FIGHT A CLASS ACTION LAWSUIT AGAINST IT RELATING TO A 2018 LISTERIOSIS OUTBREAK

The assumption when Old Mutual undertook its managed separation from 2016 to 2018 was that UK investors would invest in the newly created UK business, Quilter, and the SA investors would focus on the local Old Mutual business. But enthusiasm for the Africa-focused Old Mutual has been muted. And more than half the shares in Quilter are held by SA institutions.

Nicholas Stein, who carries bags for Neville Chester in Coronation’s aggressive equity boutique, says Quilter management reshaped the business from a pan-european life insurer to a UK wealth management business.

It has a vertically integrated model and operates in more sectors than its peers. It has a platform, similar to an Sa-linked investment service provider; it offers financial advice for the mass affluent market; it has a stuffy discretionary wealth manager of the kind the British flock to and a multimanager. Also, its life book is in run-off.

Stein says Quilter is well-placed for the “seismic changes” in UK pensions. Much of the capital could not be accessed historically by Quilter’s advisers as it was locked up in defined benefit (DB) pension funds, a paternalistic system in which the company provided a predetermined pension to staff. But 88% of DB funds are now closed to new members. Newcomers will use marketlinked defined contribution funds instead, where Quilter can play a role.

In 2012, disclosure on fees was improved and upfront commissions were replaced by direct payment to the adviser. It also led to a move away from independent advice — a pipe dream as few advisers can cover the whole market objectively — to restricted advice. Quilter’s advisers fall predominantly into the latter category.

Stein says auto-enrolment will lead to increased wealth preservation and therefore increase Quilter’s client base.

This forces employers to offer their staff access to a pension fund, though they need not make it compulsory. But the event that probably deserves to be called seismic is pension freedom — the exact opposite of what has happened in SA. The UK government has removed the requirement to buy an annuity on retirement. Retirees can now take the cash or use a flexible drawdown product, similar to living annuities in SA.

By last year about a quarter of UK industry annuity sales had moved to drawdowns.

Trying again

However, Stein argues that Quilter is inefficient because of its acquisitions. It has an ageing proprietary back-end system which has not proved scalable.

After a failed attempt to upgrade using International Financial Data Services, which cost £350m, Quilter is trying again with another IT contractor, FNZ. But it has sold noncore businesses such as direct asset manager Old Mutual Global Investors, now Merian. And it is getting more business across the value chain, not just in one area such as advice. Coronation expects double-digit growth in Quilter’s earnings, even though its tax rate is expected to increase and profits from the closed life book are falling. There are concerns about Brexit, but however it goes, the UK will remain among the world’s five largest wealth management markets, with plenty of room to grow.

It doesn’t need to go elsewhere.

Stein believes that Quilter is on an incredible 50% discount to fair value, a deeper discount than Old Mutual itself or even Liberty. It has a 5% dividend yield, which looks attractive if you still consider sterling to be a hard currency — and in the long term it must be.

Quilter has a vertically integrated model and operates in more sectors than its peers