How to find quality and profitability in financial companies

The CT UK Capital & Income Investment Trust assesses investments against the yardsticks of quality, management and valuation. This provides a systematic way of analysing companies and their shares’ appeal.

Attributes relating to quality that score well include high and sustainable return on equity, strong market position, good margins and growth. We look to management to be efficient operators, skilled allocators of capital and well-aligned with shareholders.

Valuation is not just assessing how “cheap” a share is on an absolute basis or relative to other opportunities but is also a comparison of our estimate of a company’s worth relative to its share price.

MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Importantly, it is forward-looking and based on tangible drivers of value such as cash flow, dividends and asset value. Here are three stocks that stack up well on this basis. They are all financial companies that provide capital to others, but they are very different from high-street banks.

Finding value in private equity

Intermediate Capital Group (LSE: ICG) is a global leader in alternative asset management, investing money for itself and on behalf of its clients in private companies. Over many years and a growing number of strategies, ICG has generated impressive returns; this in turn has attracted more investors to its funds, which have grown strongly.

ICG has a well-regarded management team and in our opinion, the valuation does not reflect the considerable growth opportunities within its existing strategies, in new strategies and expanding geographies.

OSB Group (LSE: OSB) is a leading mortgage lender operating in specialist areas – particularly for the professional buy-to-let landlord – which are not well served by the main UK banks. Specialist skills and systems are often necessary in order to be able to operate in these particular areas, which are also arguably too small to be of much interest to larger banks.

This provides the opportunity for OSB to lend at attractive risk-adjusted prices, which, with its efficient cost base, then translate into profitable returns. The death of buy-to-let has frequently been predicted in the press, but this is much less relevant for professional landlords with multiple properties, and OSB has continued to grow.

A remarkable record

Burford Capital (Aim: BUR) is the leading global finance and asset management firm focused on law, mostly providing capital for litigation. Through its skilful due diligence, it has a remarkable record in backing successful cases. Since its inception through to 30 September 2024, of the cases it has backed 76% have settled in their clients’ favour, 17% have gone to adjudication and won, leaving only 7% that have lost at adjudication.

This translates into very attractive returns, with an average 84% return on invested capital and 26% internal rate of return – figures that would be the envy of any investor and serve as a powerful incentive to invest in the Burford funds.

The founders have very significant shareholdings and have shown great skill and energy in developing the business, which they still lead. The valuation is not straightforward as, like ICG, it is both a financier and asset manager. Still, the stock trades on a prospective price/earnings (p/e) ratio of less than ten.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.