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Time to shine for underperforming ASX-listed fundies
ASX-listed active fund managers have been one of the worst performing sub-sectors of the market in recent years.
Fund managers generate profits by charging management and performance fees to their clients, based on the volume of assets they manage (assets under management or AUM). The profits are a function of inflows from new or existing clients and market movements.
Magellan Financial Group, after a protracted period of underperformance and the departure of its long time CEO, Hamish Douglass, saw AUM fall $53.7 billion or 47 per cent over the course of FY22. This resulted in a disastrous 76 per cent fall in the value of the shares. Platinum Asset Management, led by billionaire Kerr Neilson, saw its shares fall by 65 per cent on the back of modest performance and a near 30 per cent fall in AUM.
These results weren’t isolated; the average sector-forward PE ratio has declined from 15x to 12x over the past 12 months. It appears investors have identified some of the structural headwinds disrupting active management and discounted the sector accordingly. These include the rise of low-cost index strategies, the rapid growth of more transparent, personalised managed accounts and an overall increase in information availability and preference for self-directed investing.
These structural trends have seen analysts covering the sector trim expectations of future AUM-inflows, and as a result, earnings. Despite the negativity, we’ve seen a strong rally in all ASX listed fund managers and their valuations over the past three months.
Source: Factset, Seneca Financial Solutions
Pinnacle Investment Management has been rewarded with a premium valuation for its ability to drive positive inflows and earnings in spite of the challenges facing the sector.
Portfolio Manager Luke Laretive, who is responsible for the Seneca Australian Shares Portfolio, says “the company’s ability to attract retail inflows was a highlight of their recent FY22 result.”
Of those companies who have seen negative earnings revisions lately, Laretive sees GQG Partners as best positioned.
“They’ve maintained consistent, positive momentum on inflows since listing and operate on sector leading margins. We really like the alignment with management and focus on returning high levels of free cash flow to shareholders.”
Active funds management remains a challenging business, however, those companies that can consistently generate positive inflows and earnings are being rewarded with premium valuations relative to the peer group and creating opportunities for value-add acquisitions and industry consolidation.
The last month has been a rewarding one for long-suffering active managers. Recent expectations for US inflation over the coming years has fallen to 3.2 per cent in July, from 3.6 per cent the previous month, according to the New York Fed’s Survey of Consumer Expectations.
It’s a good sign for the consumer economy and companies tied to it with investors starting to come back into growth stocks. There will be a lot of winners, with some active fund managers seeing their share prices rally over the last month.
