LONDON — The trillion-dollar retail investment express is losing steam, dampening the fortunes of British trading platforms that boomed during lockdowns on the back of a meme stocks frenzy.
Many stock-pickers are steering clear of a turbulent market as living costs rise and the economy teeters, squeezing the business of consumer investment platforms that are facing falling fees and thinning margins.
Even the biggest fish, such as FTSE-listed Hargreaves Lansdown and AJ Bell and those owned or recently acquired by major banks and asset managers, are struggling with wilting flows of new customers and money.
Britain’s biggest bank Lloyds told Reuters in an interview last month that inflows to its retail investment platforms – which boast 19.5 billion pounds ($24.2 billion) of customer funds – slowed in the first quarter of 2022 versus a year before, and more clients were selling than buying stocks.
The “sugar rush” of the social media frenzy that propelled stocks like GameStop last year has worn off for investment platforms, said Mike Barrett, director at financial services consultancy the Lang Cat.
“Publicly, these businesses say they’re more comfortable that their customers are doing sensible trades rather than going after some meme stock. But unfortunately, that has had a negative impact on their revenues,” he added.
The market is more daunting for the smaller investment platforms, with around half of them – seven out of 13 reviewed by Reuters – posting losses in their most recently filed annual accounts, according to a review of documents at UK Companies House.
Although accounting periods varied, the seven loss-makers included OpenMoney and PensionBee, who posted numbers for the year ending December 2021.
OpenMoney’s managing director Hayley Millhouse said the company’s founders were taking a “long-term view to achieve profitability,” partly by diversifying its services.
Romi Savova, CEO of PensionBee, said its product was “exceptionally long-term.” She said, though, that startups would likely struggle to raise finance in the current environment, adding she expected fewer new platforms to launch this year.
Reporting losses is common for startup fintech firms, which early on typically prioritize reaching critical mass over turning a profit.
Yet fierce competition and the mounting cost-of-living crisis may nonetheless stymie the sector’s growth this year, weeding out weaker players or making them takeover targets, according to many of the 15 platform managers, financial advisers and analysts who spoke to Reuters.
It’s not just a problem for British platforms; U.S. pandemic darling Robinhood posted a 43% fall in quarterly revenue in April and said it was laying off a tenth of staff, sending its stock to record lows.
“I can see a few of the smaller platforms either coming together or maybe a major player acquiring them,” said Oliwia Berdak, financial services research director at Forrester. “We had an influx of new investors in the pandemic. The question is, will those people now flee?”
Wall Street giant JPMorgan snapped up loss-making British platform Nutmeg last year, and a collapse in tech valuations broadly could make other start-up platforms attractive targets, analysts said.
British bank NatWest is interested in potential buys in the wealth sector, CEO Alison Rose told a financial conference in Rome last week.
“I think there are opportunities to look at acquisitions in that space if they are compelling,” she said.
TRUE COST HASN’T SUNK IN
It’s a very different scene from 2021, when new customer numbers across the “direct-to-consumer” investment sector ballooned, with several platforms reporting record joiners. Growth was fueled by the social media-driven meme stock frenzy which saw an army of small investors pile into shares of GameStop, AMC and other once-unfashionable companies.
But this year many individual investors, who watched their wealth grow during the historic rally in financial assets earlier in the pandemic, have been left nursing losses as stock prices have slid at a time of war in Europe and rampant inflation.
The assets held by Britain’s consumer investment platforms fell 2.5% to 906.8 billion pounds ($1.1 trillion) in the first three months of 2022 versus the end of 2021, according to data from industry tracker Fundscape.
Manuel Pardavila-Gonzalez, managing director of Lloyds’ retail investment platforms, told Reuters that the cost-of-living crisis may derail the bank’s forecast of 1.7-1.8 billion pounds of net inflows of customer funds this year, although it does not expect significant outflows.
“The true cost of living has not totally sunk in with households,” he said.
Lloyds’ platforms pulled in 400 million pounds of net inflows in the first quarter, down a fifth on the 500 million the previous year.
So far this year, new customers numbers are down more than half on a bumper 2021, Pardavila-Gonzalez said, while the proportion of sell trades to buy trades has also shifted, from around 50:50 last year to 55:45 in favor of sales, with more people sitting on cash.
Hargreaves Lansdown and AJ Bell are also feeling the heat.
Customers still added more funds than they withdrew in the last few months, the companies said, but new joiners fell sharply at both platforms compared to the prior year, down two-thirds and nearly a third to 42,000 and 36,000 respectively.
The gloom is reflected in their share prices, with Hargreaves Lansdown down 41% and AJ Bell 27% in 2022, compared with a 4% fall in the FTSE 350 Index.
Hargreaves Lansdown said the industry had seen many periods of lower investor confidence and lower flows over the years.
“It is the resilient providers who focus on supporting their clients who fare best,” said the company, adding that it expects the potential size of Britain’s wealth market to grow from 1.4 trillion pounds in 2021 to 1.8 trillion by 2025.
‘RACE TO ZERO ON FEES’
Such resilience may be a harder trick to pull for many of the less-established players elbowing their way forwards.
The review of annual accounts filed to Companies House, a government agency, found that most of the 13 mainly small and mid-sized platforms had reported losses.
However the annual accounting periods of many of these companies varied, with the end date ranging between December 2020 to December 2021, thus potentially giving an outdated snapshot of some of the companies’ finances. This is because most are private firms, which in Britain have up to nine months to post accounts. Companies that were exempt from filing full accounts because they were too small were excluded from the review.
Freetrade, which saw pretax losses nearly double in the year to September 2021, said it had sufficient momentum to ride out any downturn. It said the loss reflected expansion and a focus on increasing its customer base during the period, adding it was making progress towards profitability.
Another loss-maker, Moneyfarm, said a recent funding round led by asset manager M&G reinforced the strength of its business model, which includes offering customers some advice.
“We do think that there will be a degree of churn within our industry – those who fall by the wayside are likely to be those who … have a minimal relationship with their customers,” said CEO Giovanni Dapra.
Intensifying competition on customer fees is also pressuring smaller players, experts said, with bigger platforms benefiting from an older, less price-sensitive client base.
“There is a race to zero on trading fees,” said Berdak at Forrester. “Margins are very, very thin. So it’s about scale.”
($1 = 0.8049 pounds) (Reporting by Iain Withers and Carolyn Cohn; Editing by Pravin Char)
Indian warehouse and parks developer IndoSpace on Monday said the Canada Pension Plan Investment Board (CPPIB) will invest $205-million in the company’s new real estate fund.
The investment from Canada’s biggest pension fund is part of IndoSpace’s new fund targeting $600-million in equity commitments.
CPPIB’s latest investment in the Indian property developer will take its partnership with the company to over $1-billion in assets, IndoSpace said in a statement.
“We have made numerous investments in India’s industrial space, where we see strong demand as the manufacturing sector continues to grow and the e-commerce sector matures,” said Hari Krishna V, Managing Director, Head of Real Estate India at CPPIB.
IndoSpace is a joint venture between the Everstone Group, a Southeast Asia-focused private equity, and U.S.-based investors GLP and Realterm.
Getting caught up on a week that got away? Here’s your weekly digest of The Globe and Mail’s most essential business and investing stories, with insights and analysis from the pros, stock tips, portfolio strategies and more.
High interest rates will continue putting pressure on Canada’s housing market
The Bank of Canada this week increased interest rates for the eighth consecutive time but said that it expects to hold off on further hikes to “assess whether monetary policy is sufficiently restrictive to bring inflation back to the 2-per-cent target.” As Mark Rendell reports, the central bank raised its benchmark rate by a quarter of a percentage point, bringing the policy rate to 4.5 per cent, the highest level since 2007. With borrowing costs and mortgage rates at their highest level in years, many potential homebuyers have been shut out of the real estate market, writes Rachelle Younglai. The typical home price across the country is already down 13 per cent from its peak last February amid the bank’s attempts to rein in runaway inflation by reducing access to cheap loans. As such, the bank is predicting home prices will decline further before sales pick up later in the year.
These stocks offer portfolio stability amid rising prices
Rising interest rates were the main contributor to the woes of the stock markets in 2022. Interest-sensitive securities such as REITs, utilities, telecoms and bonds all tumbled as rates steadily increased. Combined with the collapse of tech stocks as the economy that benefited from pandemic lockdowns dissipated, we ended up with all the major stock markets in the red, and the Canadian bond market experiencing its worst loss in four decades. But there were some inflation-beaters. Gordon Pape looks at a number of inflation-beating securities that thrived in a rising price environment and are still doing well, although momentum is slowing.
The clearest sign that inflation is declining
When assessing inflation, central bankers and economists will often exclude food and energy costs, but in a recent report, Karyne Charbonneau, executive director of economics at CIBC Capital Markets, said the Bank of Canada should consider the rapid climb in mortgage interest costs “when judging the underlying inflationary trend.” As Matt Lundy writes, while the bank is raising interest rates to cool demand and tamp down inflation, its efforts are having the opposite effect on mortgage payments, which have jumped 18 per cent in the past year. Although mortgages carry only 3-per-cent weight in how the Consumer Price Index is calculated, the increase is substantial enough that mortgages are now the largest contributor to annual inflation.
Could lower cellphone and internet costs be coming?
Lowering cellphone and internet bills is a top priority for Vicky Eatrides, the new chair of Canada’s broadcast and telecommunications regulator, Irene Galea reports. Unfortunately, Ms. Eatrides is inheriting a commission that is widely seen as slow to make decisions. The continuing legal proceedings of Rogers Communications Inc.’s takeover of Shaw Communications Inc. are attracting unprecedented attention to the inner workings of the telecom industry and the future of cellular service competition in Canada. Meanwhile, two CTRC policies, concerning industry rates for broadband and wireless networks, finalized during the previous chair’s term, are still being debated among industry players. Ms. Eatrides would not reveal specifics related to her plan to lower cellphone and internet costs, but added she hopes to speed up the commission’s decision-making process.
The real savings of owning an electric vehicle
With gas prices yo-yoing this past year, are the savings associated with the lower operating costs of purchasing an electric vehicle ultimately worth it? David Berman, a Hyundai Ioniq 5 owner, compares charging costs for EVs to gas-powered vehicle costs over the same travelling distance. “I’ve driven almost 10,000 kilometres – did I mention that I don’t drive much?” he writes. “I’ve saved about $780 over the past year. Over 10 years, these savings would rise, theoretically, to a total of $7,800.” Additionally, he got a $5,000 federal EV rebate when purchasing the car in Ontario in early 2022, whittling down the nearly $50,000 list price for his vehicle to about $37,200 compared with a hypothetical gas-burning version of itself.
Record-low rental vacancy rate
There are fewer apartments available to rent in Canada than at any time since 2001, according to Canada Mortgage and Housing Corp’s annual rental report released this week. As Rachelle Younglai reports, the country’s apartment vacancy rate dropped to 1.9 per cent in 2022– down from 3.1 the year before and the lowest level in more than two decades – owing to higher net migration, the return of postsecondary students to the campus and the spike in borrowing costs. The country’s largest rental markets were under particular stress, with Toronto’s apartment vacancy rate dropping to 1.7 per cent last year from 4.4 per cent in 2021, Montreal to 2.3 per cent from 3.7 per cent and Vancouver to 0.9 per cent from 1.2 per cent. The national average monthly rental price for a two-bedroom rose 5.6 per cent to $1,258 last year, with Vancouver and Toronto commanding the highest rents at an average of $2,002 and $1,765 monthly.
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After a bull market like the one we experienced prior to 2022, it can be tempting to stick to the same investment strategies that have been working. But the underlying economic factors are set to be materially different in the coming years, which means the market is likely to look very different from what we’ve seen in the past 10-plus years.
This sets the stage for a market that grinds higher, led by large, profitable, dividend-paying companies. Here are three reasons dividend stocks can lead the next bull market.
Dividends may make up a larger portion of the total return
Over the past decade, dividends have contributed less than 25 per cent of the S&P 500’s total return, as years of low interest rates helped inflate asset valuations. Historically, though, dividends have made up a larger portion of the market’s total return. Dividends have accounted for an average of 40 per cent of the S&P 500’s total return since the 1930s, according to data from Fidelity Investments.
If inflation remains high, it will be very difficult for the market to grow via multiple expansion as it has during the past 10 years. This opens the door to dividends regressing to the long-term mean and making up a larger percentage of the total return than it has recently.
Valuations are attractive for dividend stocks
Dividend-paying stocks are currently undervalued relative to the broader market judging by the price-to-earnings (P/E) ratio. The P/E for dividend-paying stocks in the S&P 500 Dividend Aristocrats was lower than the P/E for the S&P 500 as of Dec. 30, 2022. This suggests dividend-paying stocks may offer better value for investors compared to non-dividend-paying stocks.
This is common during a bear market like the one we experienced last year. The good is thrown out with the bad, as companies with consistent earnings are sold off with the same urgency as less profitable companies. This creates an opportunity that can be identified by using the P/E ratio.
Great companies with robust business models and long histories of profitability rarely go on sale, so this can be a great opportunity to add quality names to a portfolio.
Better track record
Dividend-paying stocks have outperformed non-dividend-paying stocks over long periods of time. A study of the S&P/TSX composite index from 1986 to 2021 by RBC Global Asset Management found that stocks growing their dividend had an average annual return of 11.2 per cent compared to 6.5 per cent for the overall index and an abysmal 1.4 per cent for non-dividend-paying stocks.
This trend has even held up during economic recessions, as dividend-paying stocks have shown to be more stable and less volatile than non-dividend-paying stocks. For example, the same RBC study found that dividend-paying stocks in the composite index had a standard deviation (a measure of volatility) of 13.9 per cent, compared to 23.3 per cent for non-dividend paying stocks. This indicates dividend-paying stocks have been less volatile over the long term.
Despite the potential for market turbulence in the near term, dividend stocks remain a good option for investors looking to weather any upcoming volatility and maximize their returns over the long term.
Remember that investing in the stock market carries risks and a professional investment adviser can help assess your investment goals and risk tolerance and develop a personalized investment strategy tailored to your specific needs and circumstances.
Taylor Burns is an investment adviser at Manulife Securities Inc. and Balanced Financial Wealth Management. The opinions expressed are those of the author and may not necessarily reflect those of Manulife Securities Inc.