For an investment management company such as Hunter Hall (HHL), funds under management (FUM) are the lifeblood of the business. And here in Australia, compulsory superannuation ensures there is a steady flow of contributions looking for a home.

Despite this, fund managers still require a strong performance record in order to retain investors and attract additional inflows. Something Hunter Hall certainly does not lack.

Reflecting this, the company has been a standout performer in the Fat Prophets portfolio, appreciating by more than 8 times since our original recommendation in March 2001!

Formed in 1993, the investment manager offers a range of Trusts, each with an ethical focus. These are the Value Growth Trust, the Global Ethical Trust, Australian Value Trust and the International Ethical Fund

The ethical philosophy dictates that Hunter Hall's investments avoid companies with activities detrimental to people or the environment. These include businesses involved in gambling, armaments, tobacco and even uranium mining.

Additionally, concerns about human rights have prevented the company from investing in China, Burma and the Middle East.

Nevertheless, this restrictive investment policy has not handicapped the performance record. For example, the flagship Value Growth Trust has achieved an annualised return of 19.5 percent since inception - significantly above the Trust's benchmark return.

The strong track record assisted in attracting an all-time high net inflow of $185 million to the products in the six months to December 31 2006. As a result, FUM now stand at more than $2 billion, up from $1.5 billion the year before.

And of course, as FUM grows, so do the fees. Therefore, we were not surprised to see a 15 percent increase in net profit, to $6.2 million, for the six months to December.

In keeping with the company's ethical fundamentals, Hunter Hall donates 5 percent of its pre-tax profits to charities that support social or environmental causes. As such, $446,000 was made in charitable donations in the last six-month period.

Speaking of distributions, the lack of any significant need for the reinvestment of earnings facilitates a dividend payout ratio greater than 90 percent. And furthermore, the 100 percent franking results in a healthy yield of greater than 5 percent.

Looking forward, we expect the upward trend in FUM, and therefore earnings, will continue.

In addition to the admirable performance record, the ethical nature of the Trusts is likely to encourage future cash inflows. Ethical investing is becoming increasingly popular, particularly in relation to the heightened interest in environmental issues.

Further to this, Hunter Hall is steadily gaining recognition as a high quality investment manager. Illustrating this point are the improved ratings received from various research houses such as Morningstar and Standard & Poor's.

Many investors and superannuation trustees select products based on these ratings. As such, climbing the ratings ladder is of critical importance in attracting contributions to the Trusts.

A further advantage to the stock is the degree of operating leverage typical of financial services companies. Operating leverage relates to the percentage of fixed operating costs. A higher percentage results in a larger increase in income from a given increase in sales revenue.

The upshot is that profit margins are likely to grow as fee revenue increases. Indeed, Hunter Hall's net profit margin has expanded from 21 to 34 percent in the last four years.

The company also has a robust balance sheet, boasting a gearing ratio of zero on a net debt to equity basis. However, the strength of the company's business model and profitability hasn't been lost on the market, with a price-to-earnings ratio approaching 25.

A risk that is often levelled at investment management businesses is the threat that investment staff may leave the organisation. With regard to this, last year saw the introduction of a plan enabling the investment team to gain a discounted equity holding in the business. This mitigates the risk of a sudden exodus of key individuals due to the financial incentives, should they stay.

On the charts, Hunter Hall achieved an all time high of $13.52 in January. As viewed on the daily chart, upward momentum has since stalled and the stock has been consolidating for the last 5 months. While we anticipate an extension of the upward trend above $13.52 in time, we expect further consolidation.

Overall, the business continues to perform well and we retain our faith in its future performance. However, following the significant gains we have enjoyed since our initial recommendation and the prospect of a period of consolidation for the stock, we are taking some profits off the table. Consequently, Fat Prophets recommend selling half of Hunter Hall around $12.90.