Which players in FS might make gains post-coronavirus?

Published: Sep 03rd, 2020

Updated: Jan 08th, 2024

With so much gloomy economic news around, it’s worth looking for where there might be chinks of light. One area in particular that caught our eye is fund management, which new research predicts is likely to emerge from the current pandemic in a better position than many other parts of the financial services sector.

According to a report from the finnCap Group – the leading adviser and broker on AIM, and a Sapience client – fund managers are set to do well as they have high recurring revenues, economies of scale and are also likely to benefit from increased interest in active management, something which is predicted to become an investor trend following the market downturn experienced in Q1 this year.

The report found that whilst the FTSE All-Share fell 26.6% in the first three months of this year, fund managers experienced the most robust bounce backs, gaining 41%. In fact, of the broad range of financial services companies with return of capital employed (ROCE) of 20% or higher who finnCap screened for the report, almost half were found to be fund managers.

(Interestingly, whilst wealth managers were the only financial services subsector to outperform the market (falling 24.9%), the report noted that they have a higher requirement for face-to-face meetings, meaning they don’t have the same scalability as fund managers).

The finnCap research also predicts that exchanges are likely to come through the pandemic in a stronger relative position. Whilst noting that exchanges fell by 28.7% to levels not seen since 2017, they nevertheless recovered 20%. Moreover, high margins and ROCE mean many exchanges are well-positioned to take advantage of a recovery in underlying target markets.

And some more good news – the report concluded that the overall outlook for the broad financial services sector is promising too. That’s because whilst the crisis has introduced a severe demand-side shock, to some extent the FS sector is protected from this given how money is now largely non-cash, technology is in most cases well embedded, and face-to-face services can mostly be offered electronically.

As Nik Lysiuk, Research Analyst (Financials) at finnCap commented, all of the above “is good news for companies throughout the wider UK economy, whether they are established large corporates or ambitious growth enterprises, which will all rely on access to funding and investment to accelerate their own recovery as well as that of the wider economy.”

We’ll certainly raise a glass to that.

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