Tatton Asset Management (TAM): Growth potential overpriced?

1. Introduction

Sorry this initial post is ridiculously long, but hopefully it gives everyone a bit of detail. Tatton Asset Management provides services to UK independent financial advisors (IFAs) including fund management, consulting services and mortgage broking. A few commentators, notably Jeremy Grimes on Sharepad, have covered the group’s attractions.

The group’s financials are pretty straight-forward and I am particularly interested in the prospects and risks associated with the business’s franchise or business model. For an industry outsider, with the difficulty in getting the relevant information, this is sometimes more difficult than financial analysis, but nevertheless important and often covered in less detail elsewhere including other bulletin boards.

The group was founded in 2007 by Paul Hogarth, an experienced financial services entrepreneur who successfully founded and sold previous IFA related services businesses. The group floated in July 2017 at 156p per share, with selling shareholders receiving £40m of proceeds (with c. £20m apparently to the founder and spouse) and £10m retained within the group. Since then, it has performed well and the current share price is c. 290p.

Initially, the group provided consulting and mortgages to IFAs. In 2009, it formed a joint venture with Octopus to provide funds. In 2012, the Octopus fund manager Lothar Mentel came across to Tatton, which acquired Octopus’s stake shortly afterwards in 2013 and launched Tatton’s discretionary fund management business. Now, group effectively comprises two divisions: fund management and IFA services.

For mainly regulatory reasons, increasingly IFAs focus on financial planning (including risk appraisal and asset allocation) and are moving away from selecting and managing individual assets. The fund management division was formed to address this regulatory-driven outsourcing need and the nub of Tatton’s investment case is its potential to at least double AUM to c. £15bn over c. 3 to 4 years largely organically. At that point, it would be worth considerably more and could be an attractive target for a large fund management group. This is also effectively a bet that a significant proportion of sufficiently affluent end clients will seek human advice, at some additional cost, over DIY or automated advisory services.

2. Fund management (Tatton)

This division accounts for 81% of FY(Mar)20 operating profit before central costs.


Tatton provides “on platform only managed portfolio service as discretionary fund manager working exclusively for IFAs”. Breaking this down:

a) “Platforms” : refer to c. 14 platforms that “house” the end client’s general dealing account, ISA, SIPP or other pension scheme. This allows the client and IFA to see and manage all the investments in one place. The platforms include Aegon, Alliance Trust, Amber, Aviva, Hubwise, 7IM, Standard Life and Transact. Tatton is apparently platform agnostic.

b) “Managed portfolios” : are portfolios that match clients’ risk and investment appetite as agreed with the financial adviser. There are a range of 29 funds that with various levels of risk and investment approach. The asset alloacation and risk is regularly reviewed and rebalanced (which is the bit small IFAs struggle with).

c) “ Discretionary fund management ” means Tatton makes the investment decisions etc. and is effectively a unit trust or mutual fund manager.

d) “ Exclusively for IFAs ” means Tatton’s funds are only available to IFA clients via their IFA and are not available on a retail basis. Tatton almost uniquely and very deliberately does not compete with the IFA for the customer relationship.

Tatton is set up solely to serve IFAs. It operates across all the major platforms, has invested in IT with IFAs specifically in mind, provides communications that IFAs can share directly with the clients and at c. 15 basis points (bps) provides the lowest cost products in the market (which allows IFAs to demonstrate best value to their clients). Tatton reviews and rebalances to ensure the funds meet their regulatory criteria. By outsourcing, the IFA should also save on compliance and administrative costs. The competitive landscape for the same or potentially substitute services is discussed below. Tatton also offers “white label” funds for its larger customers.

According to the regulator (FCA), about two thirds of IFA revenues relate to ongoing rather than “one off” advice. This creates recurring revenues for the IFA and a flow of new capital into outsourced providers such as Tatton.

For many years, financial regulation of the retail market has aimed to increase transparency, match risk and reduce cost. Major legislative drivers have included Markets in Financial Instruments Directives 2004 and 2014 (MIFID 1 and 2) and the UK’s Retail Distribution review. These have had a wide-spread impact across all parts of financial services. In relation to IFAs, the aim was to move away from opaque commissions to more transparent fees. In terms of fund management, IFAs produce a financial plan with their clients with clearly agreed risk parameters. The investments are increasingly required to match these risk categories (1 to 10 with 3 to 8 by far the most frequent). This requires review and rebalancing, which in turn favours larger discretionary fund managers. The failure of star managers (e.g. Woodford), illiquid funds (e.g. property and small companies) and recent market volatility have made it increasingly difficult for in-house operations to manage within the regulatory requirements.


The obvious question is: is the market big enough or growing quickly enough to give Tatton a reasonable chance of reaching the scale envisaged by the investment thesis?

The UK IFA landscape splits as follows:

UK IFA firms appear to be unevenly distributed with a few large firms, but with a long tail of small firms. St James is the “gorilla” of the market with c. 4,300 advisers. Founded in 1991 and listed in 1997, St James pioneered the large IFA model of the “group” managing marketing, compliance and asset management, leaving each adviser focussed on advising/selling – and many make a very good living doing so. Other large groups include Quilter Cheviot (1,800 advisers) and Tilney (300). There are also a few private equity backed “consolidators”. The rationale for the larger groups is create consumer brands to drive customer acquisition, spread increasing compliance costs across a network and to create asset management scale. These larger IFAs are unlikely Tatton customers.

If we assume the first two and two thirds of the third category are relevant, Tatton has an “addressable” market of c. 5,000 firms with c. 12,500 IFAs. Tatton currently works for 595 firms or 12% of its addressable market. The revenue per adviser is consistent across firm sizes, so if we assume AUM follows the same pattern very crudely about 50% of UK IFA funds under management could be relevant to Tatton.

Tatton are open about market consolidation risk. Effectively Tatton is a bet on a reasonable number of IFAs staying relatively small and local. A network of service providers appears to provide many of the benefits of operating a larger company (e.g. compliance, fund management etc…), while retaining independence and customer ownership.

Another way of considering the addressable market is to look at the share of AUM is allocated to discretionary model portfolios. AUM in Tatton’s segment has apparently grown from £5bn in 2011 to £62.5bn in 2019. Tatton appears to have a 10% share of the segment. The key variables are overall Platform AUM growth, the DFM share and Tatton’s share of DFM. The trends for each appear favourable.

Competitive Position

The key question here is: even if the market is big enough, does Tatton have sufficient competitive advantages to achieve a market share envisaged by the investment thesis?

Tatton has scale and cost advantages over its current competitors. In the segment, with £7bn AUM it is nearly twice as large as its nearest competitor and Tatton prices at 15bps versus its cheapest competitor at 30bps. Many competitors are other IFA groups or stockbrokers, which compete with the IFAs. Based on some pretty cursory research, it appears that FE (part of a financial data group backed by Hg private equity since 2018) and LGT (the UK arm (with 358 staff) of LGT a large multi-national fund management group with Lichtenstein roots) are Tatton’s main competitors. Even then, Tatton’s pure IFA focus, relationships, lower cost and AUM scale would appear to give it an advantage. As the Tatton certainly appears to have cost and performance advantages, with its IFA focus and Paradigm, the service may also better.

The obvious potential competitors are the very large global fund managers and so-called “robo advisers”. Vanguard, BlackRock and Fidelity have not entered the market directly, but their products are likely to be used in the model portfolios. I have a hunch that the current market for discretionary risk rated portfolios may be too small to interest them, the UK specific regulatory burden may be unattractive and they prefer a direct customer relationship. There are several “robo” advisers that collect customer information online, allocate the assets based on a risk assessment and then invest. At the moment, they do not seem much cheaper than Tatton. Tatton is effectively a bet that some, especially those over 50, who have most of the investable wealth and more complex advice needs, will seek an advised route. I suspect it will be some time before the “robo” advisors make a material inroads and initially they will be more successful with more tech savvy younger clients with less complex needs. It is also worth noting that Blackrock is Tatton’s largest institutional shareholder with 15.8%.


A summary divisional P&L is set out below:

There is an obvious growth in AUM that with operating leverage drives higher profits and margins. In 2019, as part of an internal reorganisation to reduce the group to two divisions (fund management and services), the platform business in Paradigm was transferred to Tatton. This effectively shifted £2.7m of profit to fund management – you could take a cynical view of this.

AUM Growth

As set above, Tatton’s funds have performed well and over a sensible period would expect AUM to grow at c. 4-5% pa.

It seems that there is about a 15% asset loss each year (or 85% retention). The IFA customer base results in a steady stream of new capital from end clients. In 2019 it was net c. £90m per month and in 2020, even with Covid, it was c. £94m. According to Tatton, there are significant opportunities within its current client base.

Overall, Tatton would appear to have a strong chance of increasing its AUM substantially over the next five years. Equity Development’s forecast, which is presumably managements lower case, is £13bn by 2024.

3. IFA Services (Paradigm)

This division accounts for 19% of FY(Mar)20 operating profit before central costs. As it is not central to the investment thesis, this section is brief.

The formally separate consulting and mortgage businesses have been combined into one division ostensibly for strategic clarity, but both divisions were looking sub-scale in comparison to fund management.

This business provides compliance, business and technical advice to IFAs largely on a monthly fee model. The regulatory drivers are strong. Paradigm provides face-to-face audit style services focussed on process, training, documents and systems. It also has a central technical helpdesk that takes c. 500 calls per month from c. 100 firms. It also provides an IFA backoffice software solution (“AdviserCloud”) and has software partners for financial planning software.

The group offers mortgage services to DA IFAs. For many clients, their house is their most valuable asset and they seek advice from their IFA. Pardigm offers a “whole of market” (i.e. not limited or tied) approach to its clients and uses it buying power to get mortgage or insurance (life, critical illness or property) that would not be available to individual IFAs. Paradigm receives a share of the IFA’s fee. Again, there are strong regulatory drivers.

While consulting may appear subscale, its contribution to the group’s relationships with IFAs may go beyond financial.

4. Management, Shareholders and Operations

The key executives are Paul Hogarth and Lothar Mentel.

Paul founded Bankhall in the late 1980s, an IFA services business, which he sold to Lynx Group that was in turn sold to Scandia and Paul joined the main Board in 2002. He left in 2007 to set up PPL. Paul has also been active in the private equity sector as the majority shareholder in Citation group, a HR and legal compliance group sold to ECI in 2012. Paul was also a shareholder in Perspective Financial, an IFA consolidator, sold to CBPE earlier this year. Paul appears to know the space well, is a savvy operator and has made himself, and his fellow shareholders, material capital sums.

Lothar is a fund manager who appears to have worked at a range of “blue chip” organisations. Early in his career, he designed Barcalys Multi Manager funds. In 2012 he left a position as CIO at Octopus to join Tatton. His experience suggests he could scale as the AUM grows and the fund portfolio becomes more complex.

The website suggests that there is a sensible executive team in place that would not need to grow much to accommodate much greater scale. The organisation has been designed for its current purpose rather than reconfiguring a legacy organisation.

The group operates from a single office in Wilmslow. A quick Google search suggests property is c. £18psf in the area, which is much cheaper than operating out of major cities. (Paul Hogarth owns the office building in his pension fund – common with owner managers, but a bit odd in decent sized plc.) The NW has financial services history with lots of credit card and payments businesses based in the area, where there are good quality staff available for materially less than major cities. The group appears to be IT savvy and has scaleable systems for both businesses.

The major shareholders are as follows:


5. Group Financials

The business unit P&Ls are covered above and the group financials are pretty straight forward. A brief summary of the group financials is as follows.


In the interest of brevity, I have not set out the balance sheet or cash flow, there is not a great deal to comment on. Similarly, I have not presented key ratios that are readily available on Sharepad and elsehere, but the group has strong margins (e.g. EBIT 40%) and good cash conversion on a small capital base, which produces attractive returns on capital (e.g. ROCE 51%). If the group adds AUM on a relatively fixed cost base these should improve further.


I have attempted a rather crude sum-of-the-parts valuation, which involves allocating central costs and attaching a multiple to each division:

To the extent possible, central costs are allocated to one of the divisions. The assumption is that the divisions would be purchased privately and £400k is stripped out for operating as a listed company. After that, the remaining central costs are allocated equally. It could be argued that fund management is larger financially, but on the other hand, services has the much greater headcount.

The valuations are driven by services. The much larger SimplyBiz is valued at 14-15x and there is a size discount for services, but there would be a number of well-funded purchases with significant synergies that would support that value.

The c. 17x for fund management appears high but is materially lower than most peers. Given its attractive niche and strong “flow” Tatton might command a premium valuation. The valuation of 1.7% of AUM appears low for a sticky investor base albeit with low fees.

The current group prospective PE is 21.5x and EBIT/EV is 14.6x. While there may be some disruption to the services division, AUM is already ahead of pre Covid levels and the monthly flow back to a net of great than £90m of new capital.

The management base case appears to be £13bn AUM by FY(Mar)24 that produces £14.5m EBIT and c. £20m cash (which I assume is after generous dividends). If the £14.5 is adjusted to £15m at a 18x multiple (higher proportion of recurring fund management) the market cap would be £270m. Assuming a debt free/cash free sale, the valuation would be c. £290m, which on a per share basis would be about £5.20 versus the current £2.90. In reality, the management team probably have more ambitious plan.

6. Conclusion

In looking at Tatton, my perception of the services division has declined. On the other hand, the the fund management business appears to have unique attractions. The operation was designed with the sole purpose of serving IFA clients as effectively and cheaply as possible. Regulation continues to drive clients and IFAs to model portfolios on platforms. Tatton now has the powerful advantage of being the leading brand, with the lowest cost and decent performance. IFAs have ongoing relationships with their clients, which should continue to drive a flow of funds to Tatton.

This model produces good cash conversion with little capital requred with a high return on capital. These attractions are currently highly valued, but often it is better to buy a quality business at a fair price.

The management team are very incentivised and have a track record of exiting businesses at opportune points in the cycle. Paul Hogarth is 60 and is unlikely to want his current £25m locked up in Tatton for ever.

It is always interesting to reflect on what could go wrong and my “worry” list would be as follows.

a) Reputational damage

This would be something that would cause the IFAs to move their clients’ money elsewhere. These would include a regulatory error (e.g. not matching portfolio to risk), a cyber hack or an IT failure that prevented access to client money.

b) Consolidation

The model relies on a reasonable number of smaller IFAs that suit Tatton’s model rather than bigger groups with in-house discretionary fund management. I still believe that enough well off clients will favour advice from smaller local advisers.

c) Larger competitor

Tatton wins due to scale within a niche and focus. At the moment, there do not appear to be any major challengers, but FE and True Potential appear to have the most potential.

d) Investment performance

If Tatton performed very poorly for a prolonged period, it may suffer outflows. It appears that Tatton specialises in asset allocation rather than “chasing alpha”, which would appear to make significant underperformance less likely.

e) Key Man

Paul Hogarth has been at the centre of Tatton since its foundation and if he was removed the group may suffer. Paul appears to have been involved in other businesses during his time at Tatton. I suspect while important he is more of a figurehead and door opener than a “day to day” manager.

f) Valuation

The valuation is high and Tatton is no bargin. Adverse news would inevitably lower the toppy multiples and reduce the enterprise value materially.

While Tatton is not cheap and there are some blemishes, it is rare to see a potential high growth, cash generative, high return on capital business with a clearly incentivised management team that have grown this business and consistently made money for their investors elsewhere. As a result, I have dipped my toe into these waters with a small stake.

I would welcome views.

Hi Mike

Many thanks for the wonderful post! Some thoughts from me:

Yes, no problem with the accounts. Niggles include the revenue/profit restatement for 2019, and the regularity of exceptional items, but the general picture is one of high margins, decent cash flow and of overall ‘quality’.

I am an industry outsider, too, so I can’t give much of an insightful perspective. I guess the thinking ought to start at the client-IFA and IFA-Tatton relationships. How often do clients change IFAs, and how often do IFAs change DFM services? Not sure myself. But I suspect change is not too frequent, which ought to be positive for Tatton.

Like all fund management businesses, Tatton is ultimately dependent on its investment results. Poor relative performance at its funds will eventually filter through to the IFAs and clients, who may then choose to leave and invest elsewhere.

What is interesting is Tatton’s 0.15 bps charge is lower than Transact’s standard 28 bps fee for simply running the IT platform (Transact is owned by quoted firm IntegraFin). Seems to be more money running the IT platform than doing the hard work of actually selecting the underlying investments for the poor client!

I do think a market for IFAs will continue to exist despite robo-advisers and index trackers etc. People will still want the reassurance from a human who (should) know what he/she is talking about. I recall writing for Motley Fool 20 years ago about the advantages of DIY investing and bog-standard trackers over managed funds, and yet IFAs have not yet died out and Tatton has clearly thrived in the sector.

The impressive figures here are indeed the sizeable net inflows, which are about £1bn per year for the last four years that has helped take AuM from £2.7bn to £6.7bn. Something is clearly going right, either with the sales force or the investment returns or both.

FWIW, I am invested with City of London Investment, a fund manager where new client money has been frustratingly small compared to total AuM — which is why its P/E has often bobbed around 10x.

The 17x multiple is perhaps the crux of the valuation case. I would want more details of the peer ratings of 17x or more.

FWIW, SBIZ bought Defaqto, which arguably is a more predictable business than fund management and was valued at c16x post-tax earnings for c40% operating margins, double-digit revenue growth and significant annual-subscription revenue.

I feel 17x EBIT for Tatton as a private business is a tad rich. I recall Nick Train values his investment business at sub-10x earnings for the Lindsell Investment Trust, but can’t find a link to prove it. I did find this link that says his investment business can be valued at 1.5% AUM, which for Tatton = £105m with AUM at, say, £7bn.

AUM of £13bn at 2024 could be achievable I guess, given the steady £1bn/year of client inflows since 2017 and AUM at c£7bn now.

The excellent points you mention about management, addressable market, regulatory influences and even office costs all appear in order and so we are left with the basic questions for all fund-management companies:

  • can new client money continue to roll in?
  • what level of growth is the share price already pricing in?



Thanks for your helpful comments.

On performance, it appears to have been fine, but I suspect they are not chasing alpa. The following is an extract from the results presentation.


As always, I would be cautious with self-proclaimed performance particularly when the benchmark appears pretty subjective. However, at worst, it is probably not bad.

The respective charges are odd. My only thought is that the platforms have to deal with retail investors which requires physical (e.g. manned phones) and regulatory (e.g. reports on performance and costs) infrastructure. Despite both platforms and fund management appearing to be competitive markets, many operators seem to make high operating margins.

I suspect new money is a bigger driver of AUM growth than performance. As I recall, c. 55% of the AUM is in equities, so I doubt there will be a material “alpha” effect.

On valuation, I will have a look at Defacto. Equity Develpment provide “research” that is paid for by the company, which is quite clearly marked as marketing material rather than indepedent research. Nevertheless, it is a useful starting point. Their latest note covers the comparable point (but for obvious should always be taken with a pinch of salt).

The note is quite deliberately publically available, but if adding it to a post is a “faux pas”: my apologies.

As you say, there are some unanswered questions and a (too?) full valuation, but for all the reasons set out in my earlier post, I will keep watching and digging.

Hi Mike,

I have started to look a bit deeper into fund managers (will publish a write-up on Liontrust here soon).

The impressive point about Tatton is the sizeable net inflows of new client money, which are about £1bn per year for the last four years and has helped take AuM from £2.7bn to £6.7bn. For 2020, £1.1bn new money on £6.1b year-start AUM is a fantastic 18%. I make the previous three years at 22% (2019), 26% (2018) and 36% (2017).

Sure, the rate is declining but that’s to be expected as the firm grows. I would say if the business can sustain say a 10% rate of new client money, then the share price will retain its premium. ED reckons the overall AUM growth rate will reduce to 12% pa by 2025.

That ED note also puts Tatton’s rate of new AUM into perspective (right chart)

For now I think the main issue boils down to valuation. If you are basing your sums on a private-company basis, then I would note Liontrust’s recent purchases of private managers. Liontrust paid a consistent 1.3%-1.4% of AUM for three different fund managers, which sort of tallies with how Nick Train values his management business.

Tatton ought to be valued at more than 1.5% AUM because of its listed status and the benefits that gives to investors (share liquidity, better reporting etc).

ED looks at PEs in the sector (left chart above), though I would be cautious of that comparison. AJ Bell is a different type of business while the 39x PE for Liontrust is based on reported earnings before various adjustments. If you take the adjusted EPS figure, Liontrust trades at c21x. I would therefore check the validity of the PEs for Brooks MacD, Impax and Rathbones just to make sure P/Es of 28-plus are indeed the case.

PS No problem linking to any public document.


Thanks. Key is flow of new money, which is pretty consistent at c. £1bn pa albeit that each year that is a smaller percentage of a larger base. Even if Tatton continues to grow AUM, the current valuation is punchy (i.e. at best, it is no bargin).

Model is a bit different, not necessarily better or worse, than other fund managers. The key drivers are regulatory rather than pure performance. Liontrust’s new money is driven by relative performance. For Tatton, regulatory and cost drivers appear more important. Also, Tatton’s AUM appears to be c. 55% equities while others seem to be long only equity managers with presumably higher volatility.

I will comment on Liontrust in the relevant thread, but interestingly they are Tatton’s third biggest shareholder.

Gresham House is also on my research list.

My former “Financial Adviser” assigned my pension funds to Tatton. They seemed to chunk it into a large number of £1000 holdings in a variety of ETFs and a few OEICs. During the slump last year, every quarter Tatton sent me a letter to advise me that my assets had lost 10%. The added value was zero. I sent a snotty email to the Financial Adviser about paying 2 loads of charges for such “service”. I am trying to extricate myself from this but it is like wrestling with an octopus in a pool of crude oil. My view of Tatton as an investment prospect might be tainted!


Thanks, it is really helpful to get direct customer feedback.

This illustrates how reliant Tatton is on the financial adviser (it does not sell direct). In your case, it would be interesting to understand whether the issue was the financial advice (e.g. fund or asset allocation) or performance (e.g. Tatton versus relative benchmark). As some were ETFs and many of the OEICs are likely to be “index or risk category hugging”, I suspect customers’ main issue will be the investment choice. Regardless, Tatton will inevitably be tarnished by a poor adviser.

On costs, Tatton is c. 15bps (which is about as cheap as it gets), the platform should be c. 30 bps plus the advisor’s fees (per hour or % assets under direction).

It appears you have chosen to dispense with an advisor in favour of a DIY approach (like many on this and other BBs). Many others are not confident to do so.

We should hear more from Tatton with a results announcement towards the end of the month. The CEO spoke at a Mello event about 6 weeks ago and sounded pretty confident without giving too much away.


Some may have noticed Tatton’s trading up-date for the year to March 2021. It was positive and I will provide a summary when the results are released in mid-June.

Tatton is a simple AUM-driven business. AUM increased by £2.3bn or 35% to £9bn in the year to March 2021. £1.5bn was from investment growth or the market. £0.8bn was cash inflow. In the first half, Tatton attracted £54m of new money a month and this rose to £71m in the second.
Over the latest lockdown, I did a little wider investment reading and a couple of bits may be relevant to Tatton.

I read Nick Sleep’s letters to the Nomad fund shareholders (the letters are here). Nick, an ex-Marathon fund manager, successfully ran the Nomad hedge fund with his partner Qais Zakaria from the late 1990s until about 2014 when he retired to pursue more philanthropic activities. One of Nick’s concepts is “the benefits of scale shared” (see below, I am not sure this is particularly new). Nick describes this in the context of Costco. For many years, Costco was unloved for its 2% profit margins arising from a religious 14% mark up on cost. Nick argued that low prices, sometimes materially less than Walmart, were essential to attract new customers and increased spend from existing customers. This in turn allowed Walmart to command better prices from suppliers and pass on most to them to customers creating a virtuous circle. This together with product selection maximised sales volume per square foot. The argument is that Costco was deliberately forsaking profits today (difference to next lowest retailer) to capture customers and volumes that would drive significant future profits and that strategy/potential was poorly reflected in the valuation. Nick applied a similar profits-forgone-investment-in-future logic to invest big in Amazon in the early 2000s (which effectively allowed him to retire in 2014!). This concept is often couched in customer centric (benefits shared) or quasi economic (price/volume sales and cost benefits). However, it is really a competition killer, or as Jeff Bezos so nicely put it: “your margin is my opportunity”. I am not sure that this is that this is significantly different from Jack Cohen (founder of Tesco in 1919), whose mantra was apparently “pile it high; sell it cheap”, or as Ken Morrison, another value merchant of the eponymous Yorkshire supermarket chain, might have said: “there’s nowt new in this world”.

As many of you will know, Richard Beddard writes for Sharecope, Interactive Investor and others. He recently wrote about strategy and focussed on Richard Rumelt (the article is here). Rumelt is a strategy “guru” who is refreshing in presenting strategy as a messy process of diagnosis, action plan and review rather than a neatly pre-packaged one-idea-fits-all PowerPoint-friendly solution. Richard B looked at this in the context of Howden Joinery, a fitted kitchen provider, which I have looked at over the last 20 years and completely misunderstood. Howden spun out of Magnet with the specific aim of only serving small local builders. It explicitly did not serve or disclose its prices to retail customers. The local builder aggregates demand. People don’t do kitchens very often, and when they do, they often use trusted local tradesman recommended by word of mouth. The builder takes the measurements, leads the customer through the selection process and installs the kitchen. In this model, Howden does not need to carry the cost of marketing to or serving retail customers. The builders get both their labour margin, a good product margin and attractive financing terms (so they pay after they are paid). Howden focuses on fewer sophisticated customers and is essentially a product developer joiner and distributor - all these activities benefit materially from increasing scale. In business school or management BS jargon, Howden is a business-to-business-to-consumer (B2B2C) model. It meets Rumelt’s test of focus and carefully crafted strategy. I first looked at Howden when its market value less than £100m. It is now c. £2bn - doh!

Tatton arguably has elements of both these strategies. Its proposition is simple: it provides the consciously lowest cost, reasonably performing, regulatory compliant funds to IFAs. Its organisation and operations were purpose built. As a result, they are materially more profitable at the lowest cost. Even a “copy cat” new entrant would probably be loss making until it got to c. £2bn AUM, no mean feat. Existing fund managers have the “Magnet problem”: their consumer facing organisations cannot provide the IFA product cheap enough and in many cases they compete with the IFAs. Most current over 40s with significant sums to invest favour personal advice from a locally trusted IFA (who act a bit like Howden’s local builders). This may change, but robo advisers cost of customer acquisition is high and adoption among the older more affluent group is low. The “big boys” of fund management such as Vanguard and Fidelity do not appear to want to operate through third parties such as IFAs. Vanguard have recently set up a limited direct to consumer advice product. This is obviously a competitor to both Tatton and IFAs, but it may drive many IFAs away from using Vanguard products. At the very least, why promote the brand of someone who may target your customer? In addition, the IFAs will come under pressure to reduce total costs, which in turn should help lowest cost Tatton. Tatton is effectively a bet on the IFA model, which may erode, but I suspect will be around for many decades.

In my original post, I was wary about Tatton’s valuation and I suspect that the June review will suggest that Tatton is even more “overvalued”. While financial analysis is vital, I suspect it is equally important to understand a business‘s strategy and context in appraising its prospects.


Hi Mike,

Many thanks for highlighting the points made by Nick Sleep and Richard B. I have taken the liberty to insert some relevant links into your post.

Impressive stuff from TAM. Here is the full update.

As you say, new client money continues to roll in (see the chunky red boxes below).

£0.8b of new FuM represents a very creditable 12% of the £6.7b held at the start of the year. The company is clearly doing something right.

Investment gains of £1.5b versus average FuM employed of £7.1b implies a 21% return – just about matching the FTSE 100 total return index of 22%:


My sums indicate the FTSE is up 32% over the past five years with TAM’s investment returns up 23%. My chart above suggests TAM’s funds have outperformed the FTSE during only one (2020) of the last five years.

By way of comparison, the same calculations for Liontrust show its funds producing a 45% return over the same five years, and outperforming in three of the last five years:


Would be useful to know if you have any insight as to the performance of TAM’s funds. I am aware of certain LIO funds being great performers and presumably acting as powerful magnets for new client money. But I am unsure of TAM’s investment prowess.

I can’t help but feel there is a long chain of parties involved here – the end customer chooses an IFA, who in turn chooses TAM, who in turn chooses a fund manager (or two), who in turn chooses the end investment! TAM is indeed a bet on the IFA model – but surely that model has to deliver adequate investment returns to the end customer for it to keep attracting good sums of new money?


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Maynard, my Tatton experience suggests to me that there will soon be a day of reckoning


I would certainly not deny “your lived experience” (as the Instagram generation might put it), but it would be really helpful to understand the source of dissatisifaction. For example, poor: IFA advice/asset allocation, asset performance or generational communication. Was it the IFA or Tatton the main villain?

Tatton does appear to be attracting significant volumes of new money and regularly wins the industry award for best DFM manager (although it is easy to be skeptical about these).



Thanks for the helpful comparison with Liontrust. While they are very different, the comparison is interesting and, in particular, let me to reflect on clients’ total costs.

As I understand it, Liontrust is mainly an active equity fund manager that primarily attracts funds from retail (and I presume institutional) investors based to its performance – usually by outperforming the relevant indices. On the other hand, Tatton primary selling point is regulatory compliance and steady performance. Based on the client’s response IFA’s risk questionnaire, the client is allocated a risk rating (1 to 10) presumably based on factors such as impact of loss, time to retirement and general perception of risk. Once established, the IFA is under an obligation to keep the client’s investments within this risk category. Depending on client/IFA choice re active, passive or combination Tatton uses underlying investments to meet the rating and constantly rebalances between different types of equity (UK/Global/EM/Small), bond (Gov, corp etc), cash and alternative to meet the risk rating.

I don’t know Liontrust well, but it appears they are mainly an active fund manager with a reputation as an equity investor. Tatton provide regulatory compliant multi-asset fund management services to IFAs. Given the underlying client profile about 55% of Tatton’s assets are equities, with the remainder in bonds, cash and alternatives. Also, 13% of Tatton’s funds are index, a third wholly active and the remainder a mix. In that case, the better comparison is Vanguards Life Strategy 40 and 60 funds or ARC private portfolio benchmarks rather than the FTSE 100. Tatton’s performance appears to be in line with those. Tatton is more focussed on low-cost asset allocation rather than active outperformance.

Your post prompted me to think about costs in more detail. Tatton charges 15bps plus a fee in the underlying fund depending on investment approach ranging from 13bps for all passive to 56bps for active. The majority (i.e., mixed passive and active) will be in the mid-30s bps. By way of comparison Vanguards LifeStrategy 60 is 22bps, so comparing to Tatton’s all passive at 28bps (15+13) it appears the implied fee for regulatory rebalancing (and client comms etc…) is c. 6bps.
An advised client’s total fee is DFM (15bps), OCF (13bps to 56 bps), platform (30bps) and investment advisory fee (often 50bps to 100bps). A DIY investor could save advisory fee and possibly some of the DFM (but they don’t have the regulatory risk constraint/requirement). An advised client can pay nearly 2% pa in fees, which we all know has a major impact on long term returns. There will be regulatory and market pressure to reduce this. Already Vanguard is offering low cost advice. If clients want or need advice, which many do, the IFAs will be forced to opt for lowest cost options, which may favour Tatton. The price pressure may add to the regulatory pressure to make in-house DFM increasingly less viable. There will also be price pressure on IFAs, platforms and fund OCFs. (As an aside, I wonder if Tatton can use its increasing AuM to reduce fund costs.)

Liontrust has a similar business to Tatton and the charges are set out below (NB this compares to Tatton’s active offer, which is only a third of its AUM). It is a bit dated, but illustrative.


AJ Bell is effectively a DIY platform that is unlikely to be supported by IFAs. Quilter has its own dedicated network of IFAs, so other IFAs would be funding a competitor.

For the reasons, set out in the previous post, this does not appear to be a focus for Liontrust, while it is Tatton’s only business – for better or worse! (See post above re possible merits of this approach.)

Let’s see if they tell us more with the annual results.

Hi Mike

Ah, ok, so not a fair comparison with the FTSE or Liontrust.

The Sept 2020 half-year presentation contained this slide:

Annual returns since 2013 of between 4% and 9% (excluding Global Equity) depending on the risk profile and product chosen. Not bad.

Going back three years to the same slide:

Not a strictly like-for-like comparison with the first slide – these earlier returns are not adjusted for costs – but the returns were then between 6% and 12%.

The annual returns have therefore reduced across the board between Sept 2017 and Sept 2020. My sums suggest the intervening three years witnessed CAGRs of between 0.7% and 3.5% depending on the risk and product. Not fantastic, but there was a pandemic.

For the year to March 2020, TAM’s mix of funds seem to lose less than the wider markets, down between 2% and 12%:

For the year before, TAM’s mix of funds gained between 2% and 7% – so not spectacular.

All told I get the impression the end customers should enjoy steady, but modest returns – outperforming perhaps in bear markets but trailing somewhat during bull markets. Given TAM’s asset inflows of late, the end customers (and IFAs!) appear happy with such performances. Will await to see how TAM’s mix of funds have performed during the market rally from Sept 2020.


I finally got round to reading the FY(Mar)21 accounts and my brief thoughts are as follows.


Like most fund management businesses, the main driver is AUM, which flows from performance (in Tatton’s case, pretty much market) and inflows. Tatton’s year end is March so the improvement from 2020 to 2021 was a pretty dramatic £2.3bn or 34% rise. About two thirds was market and a third inflows. Margins are high and costs controlled, which resulted in a £2m increase in divisional operating profit.

The report doesn’t dwell on the non-fund management IFA services business, which is less than 20% of sales and profit. The mortgage advisory business benefited from the tax driven housing boom. A bit of reverse engineering, implies that the IFA consulting business was loss making or break even at best, which isn’t surprising given it is more reliant on physical client engagement

Overall, adjusted operating profit increased 26% from £9.1m to £11.5m.


It is easy to be complacent, but at 23x adjusted EBITA Tatton is fully valued and I am always worried by a business’s competitive position, which ultimately determines its future cash flows. Potential “clouds on th horizon” include:

  • IFA consolidation: private equity is consolidating the sector. The larger groups have their own fund management and therefore would not use Tatton or switch acquisitions to their own fund management. While Tatton appears to have a relatively low penetration or market share, I wonder what its real addressable market is when these groups are removed from the total market.
  • In April 2021, Schroders introduced a range of DFM funds with 15bps fees and it will be interesting to see how they fare. Interestingly, the report made a lot of Tatton’s investment in systems etc. to specifically serve the IFA customer. I still suspect larger fund groups will not do this as well. Also, L&G launched similar portfolios but at twice the fee.

The management team set out their three-year goal of £15bn AUM. Jim Collins of “Built to Last” fame (?) advocated “big hairy audacious goals”. Most plc Boards eschew these in favour of the relatively easily attainable (System 1 is a possible exception – but that is another post, on another thread at another time). Tatton envisages £3bn from new funds (which is a continuation of the current £1bn pa run rate) and £3bn from acquisitions (with a current pipeline of £1.6bn). Tatton has £45m of cash and facilities, which at 1.5% of AUM implies it could buy £3bn of AUM (IFA portfolios are cheaper than some other funds). That implies £4.5m of incremental profit (£3bn25bps fee60% margin). At current 23x EBIT that implies c. £103m of incremental value on day one, with a break even acquisition at 10x. If Tatton achieves its AUM target, operating profit would be c. £25m, which suggests a c. £500+m EV from current £270m. (Market performance is assumed to be flat and multiple remaining at current heady levels.)


My main concern in the financials was the level and nature of equity incentive for the top three executives, who have c. 75% of the EMI scheme.

Under that scheme, in 2017, the senior management team were awarded c. 3m options at a price of £1.89 (the share price at the time). The triggers were EPS growth (75%) and total shareholder return (25%) during a 3-year period. There were ranges: EPS (13% growth – 33%, 40% - 100%) and TSR (8.25% compound – 33% to 100% at 25% compound).

In 2018, 2019 and 2020 another c. 3m options were awarded on a similar basis, but these were zero cost (don’t know why, perhaps a tax change).

While the auditors have apparently applied Black-Scholes to provide an EMI option cost (at grant date?) of £3.7m. As a simple soul, if I just multiply the options by the current share price and deduct the option costs, I get a current maximum EMI option pool value of c. £19m. I suspect my valuation is closer to reality that the auditor’s.

In 2017, group divisional profit was split 75% services (IFA compliance, mortgage etc…) and 25% fund management 25%. By 2020, this split had radically changed to 20% services and 80% fund management. (For the sake of this comparison, we’ll ignore the reclassification of platform business from services to fund management in 2019.) As discussed before, the fund management approach is indexing/benchmark hugging rather than genuinely active. (The USPs, if any, are IFA service/compliance/focus). Fees are driven by AUM growth. In the year to March 2021, about three quarters of AUM growth was market driven rather than from new funds. In that case, you could take the view that each option cohort is more of a punt on the three-year market performance rather than any genuine reflection of management value add during that period.

In my view, the rewards are too large and the scheme does not fit the changed nature of the group profile. Does this seem unreasonable or mean? I will see if I can get more clarity from the business.


At 23x EBITA, Tatton is not a compelling buy (everything seems to be at least 25% over valued at the moment!), but I will hold to see if management can achieve their less than audacious goal.

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Hi Mike,

Many thanks for the update. The consistent collection of significant new client money is what the market really likes about this business.

Tricky subject options, as the IFRS2 share-based payment calculations can bear little reality to the eventual gain enjoyed by the option holders. I must admit to not understanding how the Black-Scholes sums work. Most of my shares have little or no option activity!

One way to look at the net £19m ‘earned’ by Tatton’s option holders is to compare it to the market value created. I have done this exercise in the past for Tristel.

Roughly for Tatton, the 189p share price during 2017 supported a £105m market cap. Today the 500p share price supports a £289m market cap.

You could argue the options (presently worth a net £19m) have motived the employees to create an extra £184m of shareholder value through the increased market cap. Whether shareholders foregoing £19m for an extra £184m is something you have to consider.

4.4m options are outstanding and represent 7.6% of the full 57.9m share count, although the EBT holds 775k shares that should reduce the dilution to 6.2%. The real cost to long-term shareholders is this permanent 6-7% dilution. Very difficult to determine a cost on this dilution and, for Tristel, I have assumed full option dilution for valuation purposes to at least try and reflect the impact to shareholders.

In the past I have railed against management/employees enjoying lucrative option schemes (e.g. Tristel, City of London Investment), and in both cases shareholders still did well over time. There is a similar options issue brewing at System1 (re-priced options), too. But perhaps some executives do need option plans to perform; Buffett wrote this in his 1985 report:

“I want to emphasise that some managers whom I admire enormously - and whose operating records are far better than mine - disagree with me regarding fixed-price options. They have built corporate cultures that work, and fixed-price options have been a tool that helped them. By their leadership and example, and by the use of options as incentives, these managers have taught their colleagues to think like owners. Such a Culture is rare and when it exists should perhaps be left intact - despite inefficiencies and inequities that may infest the option program. If it ain’t broke, don’t fix it” is preferable to “purity at any price”.



Thanks that is helpful.

Tough to disagree with Warren and senior team are all signficant shareholders, which is one factor that attracted me to Tatton.

The accounting makes it difficult to get a straightforward answer to: broadly how much dilution am I giving away? Your thoughts are helpful and suggest a probably acceptable dilution. I used to know more about Black-Scholes, but it is pretty esoteric and forgetable. My experience from private companies is that even Big Four auditors apply it formulaically without really understanding it or the principles behind it.

The mechanism does not appear to reward management on the basis of key business drivers that they can control (e.g. inflows, customer/IFA satisfication, market share, compliance etc…). As per my previous post, a significant driver is now market performance. That said, while earnings may be imperfect, they are simple and measurable.

If the management have anything interesting to add, I will up-date.


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