St James’s Place, the UK’s largest wealth manager, has been targeted by activist investment fund PrimeStone Capital for its high cost base and for failing to deliver value to shareholders.
On Monday, London-based PrimeStone, which was founded in 2014 by three former executives at private equity firm Carlyle Group, unveiled a 1.2 per cent stake in the wealth manager, a holding worth almost £61m.
In a letter, which was sent to SJP’s board of directors and published on PrimeStone’s website, the activist group criticised SJP’s “bloated organisational structure,” “excessive pay” and struggling Asia operation for hurting shareholder returns.
SJP, known for its expensive management fees, has come under fire as higher-cost asset managers face intense pressure to deliver value while cheaper investment platforms such as Vanguard and AJ Bell scale rapidly in the UK.
PrimeStone partners Benoît Colas and Damian Hahnloser said in the letter: “It is time for the company to address its high cost base and change its culture . . . to deliver its full value-creation potential to long-neglected owners.”
SJP has more than doubled client assets under management in the past five years, from about £55bn in August 2015 to £115bn in August 2020, when the company reported its half-year results. The wealth manager is known for its actively managed funds, and the high premium it places on — and charges for — advice.
Chris Turner, a Berenberg analyst, said Primestone’s calls for cost savings appear “optimistic” but it could be successful in pressuring the company to increase transparency of what constitutes administration expenses, and “to explain the group’s inability to extract operational leverage over recent years.”
Though PrimeStone’s concerns about SJP’s size and inefficiencies are not new criticisms of the wealth manager, Mr Turner said “they are likely to resonate” with the group’s shareholder base.
SJP operates like a franchise, and its more than 4,000 affiliate wealth managers are not direct employees of SJP. “No one cared when they had strong growth and strong earnings that costs were going up,” said one analyst. “They were operating like a growth company.”
But, unlike other wealth managers such as Hargreaves Lansdown, SJP makes money in upfront charges for investment products. When fund flows slowed across the sector in the wake of the Brexit vote and ensuing uncertainty, costs did not, the analyst said.
Over the past five years, SJP’s profitability has declined by 20 per cent, compared to competitors Hargreaves Lansdown and AJ Bell where it has grown by more than 25 per cent, despite comparable net inflows of 2-3 per cent per quarter, according to PrimeStone’s analysis.
Shareholder returns in SJP have been just 2 per cent a year since 2015, PrimeStone said, below that of the FTSE 100.
PrimeStone criticised SJP’s structure, noting that more than 120 employees have job titles that included “head of”.
“We struggle to understand how SJP can have that many departments to be headed,” said the activist investor.
One-quarter of SJP employees earn more than £89,000 a year — “a staggering statistic”, the letter said, and higher than the sector average of £67,000. SJP employs more than 1,300 people, according to company reports from 2019.
More than 80 people work in the marketing team alone, despite SJP’s assertion that 90 per cent of new business comes from existing clients or client referrals, according to the activist.
But analysts noted that much of its marketing is focused, not on client acquisition, but on adviser acquisition, necessary for its growth in the competitive UK market.
PrimeStone said SJP’s Asia operation was lossmaking — pointing to £22m in annual losses and, the investment fund said, no path to profitability. “Only a lack of attention to shareholder value can explain the continued support given by SJP to this structurally unprofitable activity over so many years.”
SJP acknowledged the letter and said “it looks forward to commencing a dialogue” with PrimeStone. The wealth manager will report its third-quarter results on Tuesday.
PrimeStone has taken public stances with its activist positions in the past. Most recently, the fund wrote a public letter to another holding, US-based healthcare company Leva Nova, in October. It noted its frustration with the company’s transparency, executive pay and leadership, among other things. Leva Nova acknowledged the letter but did not address the criticism.