Doug Goodwille from Kayne Anderson speaks to Drew Meredith from The Inside Network on market thinkers.
While a surging gold price is on hold as the world adjusts to a Trump presidency, all the factors that saw its price rise more than 50 per during his first term in office – trade disputes, fiscal deficits and geopolitical tensions – are almost certainly guaranteed the second time around.
Growth Champ Magellan Streeting Value Camp’s Platinum, but Neither Stock Shows Value
As an investment style, growth has hammered value in recent years – and this outperformance has only widened in the COVID-19-affected markets.
According to Bank of America, growth strategies have outperformed value strategies by nearly 8 percentage points since 2007, and that spread has extended further in 2020 as growth stocks – led by the tech sector – have materially outperformed value stocks.
Here in Australia, this disparity is perfectly illustrated by the diverging fortunes of funds management heavyweights, Platinum Asset Management Limited (PTM) and Magellan Financial Group Limited (MFG), representing the value and growth camps respectively.
In April, Morningstar analyst Adam Fleck pointed out that in the five-and-a-half years to December 30 2019, Magellan’s funds under management (FUM) grew at almost 30% a year, to more than quadruple, a record of inflows unmatched in the Australian market. There were only three months in that time in which Magellan experienced net outflows.
In stark contrast, said Fleck, Platinum ended FY19 with both FUM ($24.8 billion) and management fees ($295.2 million) becalmed well below where they were in FY15, at $26.9 billion and $338.6 million, respectively.
For FY20, Magellan reported average FUM at $95.5 billion, a 26% increase on the year ended 30 June 2019. The company reported net inflows in 11 of the 12 months: excluding the $862 million raised in the launch of the globally focused listed investment company (LIC) Magellan High Conviction Trust in October, an average of $405.7 million a month flowed into Magellan in FY20.
At Platinum, however, it was a very different story, with a 12-month run of outflows over the financial year stripping almost $3.1 billion from FUM, at an average loss of $257.8 million a month.
Platinum Asset Management’s run of outflows worsened through June, with a further $213 million flowing out of the manager’s funds – taking net outflows to almost $3.1 billion for the year,
Platinum’s earnings have been hamstrung by the prolonged under-performance of its core international and Asian strategies, and a near-40% underweighting the US over the five years to 31 Dec 2019 has proved quite costly. With the performance of the crucial international fund (currently sized at $8 billion) continuing to be weak – it was down 4.1% in the year to 30 June 2020 – brokers expect outflows to persist into FY21.
And that has a direct impact on earnings, in the battle of the headstocks.
As Fleck at Morningstar points out, Platinum’s inability to grow FUM in recent years is due to disappointing short- to medium-term poor fund performance – a major handbrake on earnings. “While its strategies have outperformed over the long term, in the last five years they have generally underperformed their benchmarks. It also faces increasing competition in the global equity manager space and like other active managers face the structural headwind of investors allocating more to lower-cost passive investments and major institutions in-housing some of their asset management,” he says.
“(Platinum’s) contrarian active investment style has led to relatively high exposure to developing markets. In a prolonged period where value has underperformed growth strategies, its funds have underperformed. An extended period of fund outperformance is required to attract funds and take advantage of Australia’s growing superannuation pool, with an under-allocation to global equities,” Fleck adds.
There are some positive signs. Despite the flagship strategy performance remaining “sub-optimal,” broker Citi pointed out that fund outflows appear to be moderating – down to $213 million net outflow in June, half the amount reported for March 2020 – and that the manager earned performance fees estimated at $9 million for the year ending in June, the first performance fees in two years.
On FN Arena’s collation, analysts’ consensus expects Platinum’s earnings to fall by 8.2% on earnings per share (EPS) basis for FY20, and weaken further, by 17%, in FY21 – to make three straight years of earnings slides. That is projected to have an inevitable impact on the fully franked dividend, from 27 cents for FY19 to an estimated 23.9 cents for FY20, and an estimated 20.8 cents in FY21.
Small wonder that analysts have a consensus price target projecting roughly 25% price decline.
Platinum Asset Management Limited (PTM, $4.00)
Market capitalisation: $2.3 billion
Five-year total return: -6.7% a year
FY21 forecast yield: 5%, fully franked (grossed-up, 7.2%)
Analysts’ consensus price target $3.034 (FN Arena), $3.15 (Thomson Reuters)
Morningstar “fair value”: $3.60
For Magellan, not surprisingly, the picture is a lot brighter. FN Arena’s collation has analysts’ consensus expecting 11.5% growth in EPS for FY20, allowing a 15.8% lift in the fully franked dividend, to 214.6 cents – with not much change expected in FY21.
Magellan Financial Group Limited (MFG, $62.70)
Market capitalisation: $11.4 billion
Five-year total return: 34.4% a year
FY21 forecast yield: 3.5%, 75% franked (grossed-up, 4.6%)
Analysts’ consensus price target $53.921 (FN Arena), $52.80 (Thomson Reuters)
Morningstar “fair value”: $52.00
MFG has streeted PTM as a stock – with a five-year total return of 34.4% a year, compared to a 6.8%-a-year loss for PTM – but that run sees it over-valued, according to analysts, trading on 26.4 times expected FY20/21 earnings. However, at 16.2 times FY20 earnings and 19.7 times FY21 earnings, relative value is no help to PTM: it is seen as even more over-valued.
There is a better yield potentially on offer at Platinum – but that is a function of greater stress.
