Anatomy of a ‘good’ company

In this article we will highlight aspects that we consider during our research process, using Allfunds, a European business-to-business fund platform that links fund houses and fund distributors, as an example. The business has its origins within Santander’s private bank and was founded in 2000 by the current CEO Juan Alcaraz. The core business model works by charging the fund houses a percentage of assets under administration (AuA), while operating a ‘buy-free model’ from the point of view of the fund distributors. Allfunds also provides value-added data and analytics services (Allfunds Connect), paid for by both fund houses and fund distributors on a subscription basis. Allfunds has grown AuA exponentially from €2bn in 2000 to €1.2tn as of the end of 2020, making it the largest fund platform globally.

Platform economics in action

Allfunds operates in a business area that benefits from platform economics, where scale enhances the fundamentals of the business and value proposition for customers. From a fund house point of view, Allfunds offers a single agreement that gives access to the largest global distribution network of any fund platform. From a fund distributor point of view, Allfunds provides the largest open-architecture fund offering of any platform.

Allfunds has access to over 1,500 distributors, a number it is adding to each year. It has relationships with nearly 2,000 fund houses, and global distributions with over 1,000 of these. This creates a powerful flywheel effect; the more distributors it adds, the more attractive it is for a fund house to form a relationship with Allfunds. The more fund houses that sign up, the more attractive the proposition becomes for distributors. As Allfunds continues to add distributors and fund houses to its platform, its market position becomes more powerful and the barriers to entry stronger. This scale benefit also supports the ‘stickiness’ of Allfunds’ relationships with distributors. In 2020, Allfunds had a distributor retention rate above 98%.

What are the potential drivers of growth?

For many fund house and fund distributor customers, Allfunds represents a potentially useful proposition in an increasingly stringent regulatory environment, with ever-present fee pressure. For fund houses suffering from regulatory burden and fee pressure, outsourcing becomes a way to increase cost efficiency and to expand distribution reach. Distributors are also experiencing similar pressures and face a growing demand for higher fee transparency, and consequently a greater demand for lower-cost open architecture funds.

Allfunds is also exposed to several powerful economic growth drivers. Household wealth has been projected to grow at a 2% compound annual growth rate (CAGR) between 2019 and 2024 and financial assets are gaining share versus other assets as a portion of household wealth. This trend should be strongest in Europe (Allfunds’ largest market) with 43% of household wealth held in financial assets in Europe vs 70% in the US. Allfunds has been gaining significant market share, largely through organic growth (adding distributors and fund houses) but also, more recently, through merger and acquisition (M&A) activity, although that comes with inherent risks.

Allfunds’ Data and Analytics business ‘Connect’ provides additional growth optionality outside of the core platform business. Connect provides a single platform for fund information, fund execution, investment solutions, data & analytics and digital wealth solutions. Of the more than 1,000 fund houses that have global distribution agreements (GDAs) with Allfunds, 19% are Connect subscribers. Of the 170 fund houses that signed a GDA in 2020, almost half chose to become Connect subscribers. This highlights the growth potential, but also the increasing need of data and analytics for both fund houses and distributors.

Among the headwinds identified, we note that Allfunds arguably faces some ‘key person’ risk. A number of senior executives, including the founder and CEO, have been at Allfunds since it was founded in 2000.

Scalability fundamental to the company’s targets

Allfunds generated EBITDA margins of 71% in 2020 and has targeted an annual margin of 75% by 2025, supported primarily by operating leverage from the business’ inherent scalability. A key challenge Allfunds faces in achieving this aim is preserving net platform margins. This follows recent erosion of core margins, due to a shift to clean share classes, expansion into new markets (at lower initial margin), ongoing pressure that stems from the shift from active to passive fund management, plus higher regulatory pressure. Allfunds believes it can generate higher margins in other areas (we note a recent strategic agreement with BNP Paribas to develop next-generation fund distribution services), such as higher margin agreements with smaller fund houses and the growth of mix positive sub-advisory business.

While Allfunds is used solely as an example here, it highlights some of the topics addressed when building an investment thesis for Janus Henderson’s Pan European Equity strategy, assessing potential returns and margin of safety, quality & sustainability, potential mispricings, catalysts for change, and fundamental/technical momentum. The thorough ongoing analysis of every business under consideration is part of a distinctive offering with a focus on identifying those businesses generating high and sustainable returns that does not seem to be accurately priced in (or with unpriced optionality), or businesses where there is a specific catalyst that could transform the returns generated over time.