Compelling Value in Highbury Financial

One company whose valuation I find to be extremely compelling at the present time and which is a large holding in my portfolio is that of Highbury Financial (HBRF.OB). Highbury Financial operates sub-advised mutual funds under the Aston label and has such managers under its umbrella as Montag & Caldwell, Optimum Capital, River Road, TAMRO and ABN AMRO among others. The company has no analyst coverage at the present time and is traded on the OTC BB but has a very strong management team led by members of Berkshire Capital who have experience in acquisitions.

Until recently, almost half of the assets of the firm were concentrated in one manager, Montag & Caldwell, who is a large quality growth manager based out of Atlanta who did extremely well in the bear market earlier this decade but struggled from 03-06 only to have good returns once again this year. Because of the large concentration in this one manager, the AUM levels were fairly volatile and did experience a bit of a decline over the past couple of years which is only now starting to reverse.

The new management team at Highbury (Aston Funds), who acquired these funds from ABN AMRO in 2006, have embarked on a strategy of acquiring fund families to diversify the overall manager blend in the portfolio. In the past 4 months, the following subadvisors and strategies have been added: ABN AMRO Global Real Estate, Resolution Global Equity, Cardinal Midcap Value, Montag & Caldwell Midcap Growth, ClariVest Midcap Growth, SGA International Small-Midcap, Neptune International and Barings International.

My expectations are that as Aston continues to add subadvisors, the overall AUM will steadily increase over time as the funds gain new traction. In the two months ended 11/30/07, the overall AUM on the mutual fund side (does not include separate accounts) has increased by 1.5% to $5.018 billion while the S&P 500 fell 3% in this same period. The current market cap of Highbury is just $42 million (non-diluted basis) and the company has over $11 million in cash while being profitable with cash earnings reported last quarter of 0.12 per share (diluted earnings of 0.09 per share).

My belief of the reasons for the significant discount are three-fold: 1) lack of coverage and investor knowledge about the company, 2) ABN AMRO was recently acquired by a consortium of RBS, Fortis and Santander, 3) AUM declines.

As to the first point, in time I believe people will learn of Highbury and of the value of the Aston Funds which will in turn bring analyst coverage. In terms of the ABN AMRO acquisition, I have spoken with members of Fortis who have told me that the growth team at ABN will be replaced by an internal team which has a much stronger record which could actually be a benefit for Aston next year.

Finally, to the third point I have mentioned that AUM had been somewhat flat over the past couple of years despite the market climb but I am confident that Aston's new funds and the improved performance of some of the sub-advisors will help drive asset growth in years to come.

Disclosure: Long HBRF.OB

Comments

[stockdude:]

Interesting. I just saw the news about the stock buyback.

2007 Dec 20 06:05 PM

[Dan Weiss:]

It is slowly climbing and my guess is that the reason for the inexpensive valuation is somewhat due to the obscurity of the stock and the fact that the trailing p/e will not become positive until the next earnings report. My estimates give the stock a p/e of just over 10 along with over a dollar per share in cash giving the stock and enterprise value/earnings ratio of about 7.

2007 Dec 27 09:26 PM

[Dan Weiss:]

Highbury is continuing to deliver with a decent AUM growth for the second quarter (which will be reported in a couple of weeks) especially considering the difficult market environment and strong performance out of many of the underlying mutual funds. The balance sheet is very attractive with no LTD and plenty of cash while operating cash flows and earnings continue to flow through.

2008 Jul 15 09:11 PM