Fiducian Portfolio Services Limited (ASX:FPS) is a small fund manager that also owns a small network of financial planners and even accountants, and software on which planners can run their business. Shares are up over 40% since I put Fiducian Portfolio Services into the Hypothetical Ethical Equities Portfolio.

The company is part funds manager, part financial services roll-up and part software company: three businesses that each have attractive characteristics. The funds under management provide recurring free cash flow (in the form of the dreaded management fee) and the software segment has the potential to provide a decent revenue stream if the company is able to license it to more independent financial advisers. However, these accountancy resource services provided just 3%  of revenue in FY 2013. The acquisition of small financial planning practices and small funds gives the company a roll-up element which, combined with share buy-backs, are driving earnings per share growth for Fiducian. Basically, as long as the company continues to grow FUM or rather, FUA (Funds Under Administration), profits should rise.

Although the most recent quarterly slightly under-performed my expectations, historically, the company generates more cash in the fourth quarter. Embarrassingly, I freaked out a bit until a friend pointed this out to me (thanks again). The company bought back some shares earlier this financial year so even if earnings remain flat (which I doubt) earnings per share should grow.

I'm not crazy keen about the ethics of the business but for what it's worth I do think the company has very strict standards for its advisers and I believe they have booted planners in the past for not doing the right thing. Unlike the Commonwealth Bank, I couldn't find any examples where they had caused significant harm to customers, and I suspect most clients do OK, even if they under-perform the market. The company's Indian investment fund may also prove to be a strong selling point in the years to come, especially if India becomes a growth powerhouse. I doubt it will any time soon, but it may, since the new government seems a bit more focussed on basics like half-decent sanitation. Once you have decent sanitation and better power supplies the population can become a lot more productive.

In other news, the company announced that it had purchased a financial planning business with $66 million FUA from which it expects to extract NPAT of "up to $400,000" per annum within 2 - 3 years. The company says the purchase is estimated at 4x EBIT (which I suspect may be a bit optimistic) but in any event it looks earnings accretive. Based on EBIT of $2.8 million for the first half of 2014, the company is trading at about 9 x EBIT.

More important for me was the news that the company now has a bit over $1.3 billion in funds under advice (including the $66 million). That means the company has either more FUA than it ever has, or very close to it. With a market capitalisation of only $54 million, the value proposition should be clear, especially since margins should improve with scale. Suffice it to say I feel stupid for selling some of my shares and am even considering buying some more. In my book Fiducian is a reasonable buy at $1.70. Just watch out below if the market tanks, because at that price, the margin of safety is not what it should be for a funds manager. In part, I'm not buying more Fiducian right now because I also own Australian Ethical Investments Limited (ASX: AEF) (purchased at $33 from memory) and I probably don't want too much exposure to fund managers in case the market does tank. On the other hand, I confess I'm tempted (or is that just greed getting the better of me?)

The author owns shares in Fiducian Portfolio Services Limited. Nothing on this blog is advice, ever, and may even be plain wrong. The purpose of this blog is to document my thoughts on different companies in an easily accessible way and to make connections with likeminded investors. Subscribers to the Free Newsletter get send research first, and have access to the Hidden Research.

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