This battered small-cap could see a stunning turnaround this year

Investment group Charles Stanley (LSE: CAY) has a rich heritage of managing money for investors, although recently the firm has been struggling to control its own fortunes.

Increasing competition coupled with the lack of volatility in markets has hit the group's bottom line, so management has taken action to restructure the business.

These efforts have paid off. Today the group reported a 30% increase in pre-tax profit for the year to the end of March from £11.5m to £8.8m as revenue climbed 6.6% to £151m. Profits expanded despite administrative expense growth of 4.4% from £136m to £142m. Funds under management and administration decreased year-on-year to £23.8bn from £24bn, although this figure tends to bounce around due to market movements. Discretionary funds increased by 7.9% to £12.3bn from £11.4bn.

Off the back of this robust trading performance, Charles Stanley lifted its total dividend by 33% to 8p.

Undervalued growth

I believe, the investment group's performance for the year to the end of March 2018 is a testament to how hard the company has worked over the past few years to turn the ship around and is a significant improvement on the net loss of £6.2m reported for 2015. What's more, I believe this is just the start of the company's recovery.

According to CEO Paul Abberley, the focus of Charles Stanley in fiscal 2019 "will be on driving top-line revenue growth whilst improving operational efficiency," as the firm seeks to leverage the changes brought in over the past five years, mainly a focus on higher-margin business. For their part, City analysts are forecasting earnings growth of 38% for the year on net profit growth of 45%. The group's dividend distribution is expected to expand by a similar amount.

And the best part is, you don't need to pay over the odds for this growth. Shares in Charles Stanley currently trade at a forward P/E of 14.4 and a PEG ratio of 0.5, implying that the stock is undervalued when factoring-in the growth the company is expected to produce.

Hedge your bets

If you are not interested in Charles Stanley, there's another City institution that also looks to be an exciting opportunity at current levels.

Man Group(LSE: EMG) is one of the world's few publicly traded hedge funds, giving the average investor the opportunity to diversify a portfolio in a way only usually available to high-net-worth individuals.

Man's earnings are tied to the performance of its funds, which makes for a volatile bottom line. Still, earnings volatility aside, the company has built a reputation for itself recently as an income champion. The stock currently supports a dividend yield of 5%, and analysts have pencilled in payout growth of 12% next year, giving a potential yield of 5.3%.

Management is also returning cash via stock buybacks. Last year $350m was returned to investors via buybacks and dividends. Over the past five years, the company has returned a total of $1.5bn to investors through buybacks and dividends.

So, if you are looking for an income champion to sit alongside Charles Stanley in your portfolio, Man could be an ideal candidate. Also, while the former has warned that stock market volatility in 2019 could hamper profit growth, Man's trading business thrives on volatility, providing a perfect hedge against uncertainty.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.