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AJ Bell

In the below note, we’ll unravel the compelling reasons why we view AJ Bell as an exceptional investment opportunity.

AJ Bell’s investment platform empowers UK retail customers to seamlessly buy shares, funds, and ETFs online or via a user-friendly app. The company has strategically focused on providing a low-cost solution tailored to the needs of investors with less than £100k in assets.

The UK Pension Market

The UK pension market is a highly attractive sector, growing at a robust 14% annually. This growth is driven by aging demographics, mandatory employee pension enrolment, and increased access to financial information, which has led more retail investors to seek control over their investment portfolios.

Notably, the shift away from traditional defined-benefit pension schemes toward defined-contribution (DC) schemes has created a significant market opportunity. Since 2012, employers have been required to enrol staff in DC schemes, resulting in a surge in pension assets on platforms.

AJ Bell has capitalised on this trend by doubling its market share in the UK pension platform market in recent years. Their success is indicative of customers’ preference for their platform, driven by its affordability and trusted brand.

Business Model

AJ Bells business model can be viewed as a flywheel – a powerful sequency of reinforcing actions which create momentum within a business. We could start with any of the below points, as each provides the opportunity for the next.

  1. High Switching Costs

Once a customer joins AJ Bell, they tend to remain a client for over 20 years, continuously contributing to their invested assets.

  • Captive Audience

Over time, valuable, long-term clients create opportunities for cross-selling additional products. AJ Bell’s own fund management business has expanded its assets under management by an impressive 10-fold in the last few years.

  • Invest in Cost Reduction and Brand Awareness.

Management’s strategic focus on enhancing brand awareness and lowering operating costs has led to a remarkable increase in profit margins from 26% to 39% over the last six years, all while maintaining competitive pricing for customers.

  • Customer Acquisition Costs

Enhanced brand awareness has driven down customer acquisition costs, enabling AJ Bell to invest in innovative customer acquisition tools like Dodl, a low-cost investment app aimed at beginner retail investors.

The powerful combination of low prices, brand awareness and cost efficiencies has been the recipes for some of the best businesses ever created, such as Amazon and Costco. We particularly like businesses with high switching costs, as they allow for predictable and durable investments when combined with multi-decade structural growth opportunities.

Business Economics

AJ Bell has fantastic economics alongside its exceptional business model. The business possesses almost 40% profit margins, having increased from 29% in recent years. Revenues have grown at 17% per year for the last six years, of which more than 85% is recurring. Profit growth has outstripped revenues at 22% per year. The company generates a remarkable 46% return on capital. A dividend yield of more than 4% is supported by a debt-free balance sheet with £87 million in net cash.

Value of Patience

In closing, it is essential to emphasize the value of patience in investing. We have been monitoring AJ Bell since shortly after its IPO in 2019, and the company’s performance has been nothing short of impressive. Despite doubling its market share, navigating market fluctuations, and substantially increasing revenues and profits, we have been able to establish our position at a more than 25% discount to its initial share price when we first identified this opportunity.

We believe AJ Bell represents a compelling investment case, combining a strong business model, robust financials, and a significant growth runway in the thriving UK pension market.

If you would like to know more about our investment strategy and investee companies, please don’t hesitate to contact us.

Written by Brett Rogers, Investment Director, Middleton Enterprises