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Pendal Edges Janus in the Battle of Funds Management Value
Listed fund managers Janus Henderson (JHG) and Pendal (PDL) share plenty of similarities: they are both predominantly value-style managers, and they both offer funds spanning North America, UK/Europe and Australasia. Neither has enjoyed the long run of “growth” stock superiority – which has made their headstocks ASX laggards – and both are banking on a value comeback post-COVID.
Let’s look at them in turn, starting with the smaller Pendal.
PDL has not been a great stock to own in recent years, delivering a loss of 14.2% a year over the past three years on a total return (share price plus dividends) basis, and a dismal minus 5.5% a year over the past five years.
In the most recent financial year, FY19 (Pendal’s financial year ends in September), Pendal’s average funds under management (FUM) stayed virtually the same – it was down 1%, at $98.8 billion. The base management fees were down 4%, at $482.6 million, while the much smaller performance fee component slumped 89%, to $5.9 million, as market uncertainty surrounding Brexit hit European sharemarkets and investors pulled a net $4.7 billion out of its funds. As a result, Pendal’s earnings per share (EPS) fell 19% for the year, to 51.3 cents, driving a 13% decline in the dividend, to 45 cents a share.
Since then, total FUM edged 1% higher in the December 2019 quarter, to $101.4 billion, but the COVID Crash saw FUM slump by 15.2%, to $86 billion, in the March 2020 quarter. In the June quarter, FUM increased nominally by $11.1 billion, but a rising Australian dollar stripped that back by $5.2 billion, equating to a 4% rise in FUM for the quarter, to $89.4 billion. The company said new mandate wins would add $1.5 billion of new investment to FUM in the September quarter.
On FN Arena’s collation of analysts’ estimates, FY20 (ending in September) will see Pendal’s EPS fall by 18.1%, to 44.6 cents a share, allowing a dividend of 36.6 cents a share, down 18.6%. Compared to FY18 figures, that would mean EPS had fallen by 38% in two years, with the dividend down by almost 30%. Things aren’t projected to improve much in FY21, either: analysts expect EPS of 42 cents and a dividend of 36.4 cents.
Thomson Reuters/Stock Doctor is slightly more upbeat: its collation looks for EPS of 47.3 cents and dividend of 37.5 cents in FY20, weakening to EPS of 43.9 cents and dividend of 37 cents in FY21.
However, brokers are quite bullish on Pendal – as investors would hope, with the share price sliding from levels close to $12 three years ago to the depths of $4.05 in the COVID Crash. Despite weakness at the UK-based active share investment firm JO Hambro Capital Management (JOHCM), analysts have a consensus valuation on PDL of $6.586 at FN Arena (seven brokers), and $6.75 from Thomson Reuters (11 brokers). Both estimates are well north of the current share price of PDL, at $5.88.
The US/UK combination of Janus Henderson has also not been a great ASX performer, with JHG stock showing a total return of minus 4.6% a year over the past three years, and minus 7.3% a year over five years.
Janus Henderson ended 2019 (the company is a calendar-year reporter) with FUM of US$374.8 billion, a rise of 14% for the year, despite net outflows of US$27.8 billion, with strong markets and performance offsetting the outflows. Unsurprisingly, given the COVID Crash, those offsetting factors were not present in the first quarter; and FUM decreased by 21.5% – or US$80.8 billion – to US$294 billion. Net outflows for the quarter were US$12.2 billion.
The core management fees held up well, down just 3% to US$395.5 million for the quarter, while performance fee income slid 20%, to US$14.6 million. To put the importance of those figures in context, in 2019 Janus Henderson earned US$1.79 billion in management fees, and US$17.6 million in performance fees.
FN Arena’s collation has analysts expecting JHG to show a 14% fall in EPS in 2020, in US$, but a dividend increase to 145.8 US cents. At current exchange rates, that would equate to EPS of 306.9 cents, and a dividend of 210.7 cents. At that conversion, investors would be looking at an unfranked yield of 6.7%.
Pendal’s expected FY20 yield comes in nominally lower, at 6.3%, but the 10% franking almost gets the grossed-up yield to parity with that of JHG, at 6.6%. But on a total-return basis, analysts see greater scope for capital growth from Pendal.
At a share price of $31.19, JHG is too close to FN Arena’s analysts’ consensus target price – of $31.235 – but Thomson Reuters/Stock Doctor’s analysts’ consensus target price is a bit more expansive, at $33.42. As usual, the consensus covers a wide range of opinions, from Credit Suisse’s target price of $16.44 to Morgan Stanley’s $38.50.
In contrast, brokers are reasonably positive on Pendal, which leaves it potentially offering significantly greater value. The lowest price target for PDL in the FN Arena broker sample is $6.00 (at UBS), with the highest being Ord Minnett’s target of $7.30, more than 24% above the current price.
