What: Fund manager Australian Ethical Investment Limited (ASX: AEF) posted a record revenue and net profit result last week, as it enjoyed the benefit of rising equity markets and record net inflows. The full year saw a net profit of $2.543 million on revenues of $19.9 million.
A final dividend of $1.20 per share was declared, which took the full year payout to a fully franked $2, up 135% on the prior year.
Shares have more than doubled in value over the past year to close at $45.80 on Friday.
Now what: Australian Ethical earns revenues by charging fees on a percentage of funds under management (FUM) and saw net inflows of $92 million over the past year, $78 million of which came from super contributions. The group had $887 million in FUM at the end of the year and said both its superannuation and managed funds had seen inflows thanks to improved investment performance and successful marketing.
Ethical investing is clearly a growth space and Australian Ethical has likely benefited from the decision to reduce fees over the past few years from levels that were evidently uncompetitive. What is now a potentially lucrative space has also attracted big hitters like AMP Limited (ASX: AMP), BT Investment Management Ltd (ASX: BTT) and many others all looking for market share.
There are also very low barriers to entry, which means Australian Ethical faces the potential for others to come along in an attempt to muscle in on its space. To start your own ethical offering you don't need much more than some lawyers to apply for your Australian Financial Services License and draft your product disclosure statement and financial services guide. Appoint a trustee, fund accountant and custodian to safeguard the assets and it's possible to compete on a low-cost basis relatively easily.
What of the outlook: There's no doubt Australian Ethical has the potential to grow bigger and be run more cost effectively. If it remains competitive fee wise and delivers reasonable investment performance it could continue to attract substantial fund inflows. Its competitive advantage should be that it is able to attract funds from those seeking a genuine alternative to the actively-managed offerings of mainstream corporate Australia. The key to attracting inflows will be promoting itself effectively through social media, mainstream media and the traditional distribution channels.
Selling at $45.80 the shares trade on 18.4x 2014's earnings per share of 2.49 cents, with a handy 4.4% dividend yield. This may be good value if Australian Ethical is able to continue to grow at rates above the industry average. However we know a business that's already developed some strong brand power, pays a big dividend and looks set for a bright future.
