Australia’s funds management industry is a very successful one: with $2.8 trillion in funds under management (FUM), Australia has the sixth-largest managed funds pool in the world, and the largest in the Asia-Pacific region.
The industry’s growth is driven by three major factors: the nation’s universal and mandatory superannuation system; a well-developed insurance industry; and a growing high-net-worth and retail investor base.
The superannuation driver, in particular, is rivers of gold: by 2033, says Deloitte, the super pool is projected to burgeon to $7.6 trillion on its own.
It is also an industry that is poised to follow other successful services industries – such as tourism, health and education – in becoming an export powerhouse. In particular, the Australian funds management industry is on the cusp of engaging with Asia, in a potentially massive two-way flow.
A flurry of recent developments has aligned the planets for the funds management industry’s export prospects. The first is Australia’s status as a renminbi (RMB) trading hub, with direct convertibility between the Chinese and Australian currencies. The second was the signing in 2015 of three Free Trade Agreements (FTAs): one with each of South Korea, Japan and China, which join in the region Australia’s ‘plurilateral’ FTA with the Association of South-East Asian Nations (ASEAN).
The third was the Asia Region Funds Management Passport (ARFMP), proposed by the Australian government in 2010, and signed at the APEC Finance Ministers meeting in September 2015 by Australia, New Zealand, Japan, Korea, the Philippines and Thailand. The Passport, which got under way with a pilot program in 2016, is designed to standardise regulations and allow investment funds domiciled in one country to be sold directly to retail investors in another.
Even moderate inflows from Asia under the Passport are expected to result in $100 billion worth of funds being added to the Australian funds management industry, but in a report released in August 2015, consultant AT Kearney stated that if the Passport could capture just 2%–4% of the funds held by European Union-domiciled funds in Asia, it could exceed $600 billion of FUM by 2030, equivalent to about 11% of the Asian mutual funds market.
But in the short term, there is a shakeout in the funds management industry as active managers are disrupted by a profound shift to lower-cost “passive” investment vehicles, such as exchange-traded funds (ETFs) and index funds. How active managers adapt to this market shift will determine, for many, whether they are eventually able to enjoy the growth that is on the horizon.
Let’s take a look at the five largest pure-play fund managers listed on the Australian Securities Exchange (ASX):
Magellan Financial Group (MFG, $27.50)
Market capitalisation: $4.7 billion
Consensus estimate FY18 yield: 3.7%, fully franked
Five-year investment growth rate: 68.4% a year
Analysts’ consensus target price: $27.13 (FN Arena), $27 (Thomson Reuters)
Magellan Financial Group is an active international equity and infrastructure fund manager, which is very well poised to benefit from the tailwind of Australia’s growing superannuation pool, and the increased flows being directed into international equities. Co-founded (and still led) by renowned investor Hamish Douglass, Magellan and its flagship Magellan Global Fund have built a devoted following in the managed funds industry, on the back of their ability to deliver outperformance over a long period of time.
The $9.2 billion Magellan Global Fund has earned its investors 11% a year since inception in July 2007. Magellan now operates eight managed funds, two of them listed investment companies (LICs) on the ASX. Magellan manages $50.6 billion in total FUM, 71% of that retail, and 29% institutional: the retail component generates 57% of base fees, and institutional 43%.
Magellan has been a superb performer on the stock market, too, with a five-year total return (capital growth plus dividends) rate of more than 68% a year. It is a high-quality business, with earnings per share (EPS) expected to grow by 15% this financial year, but it is also seen by analysts as having outstripped value: MFG is up 15% this year, and is trading at 20.1 times consensus FY18 earnings, but despite its buoyant long-term prospects, is seen as having limited upside for the moment.
BT Investment Management (BTT, $11.15)
Market capitalisation: $3 billion
Consensus estimate FY18 yield: 4.7%, 32.79% franked
Five-year investment growth rate: 51.2% a year
Analysts’ consensus target price: $11.70 (FN Arena), $11.45 (Thomson Reuters)
BT Investment Management took a huge step in 2011 when it bought UK-based JO Hambro Capital Management (JOHCM) and the acquisition has proven a company-changer. BT Investment Management already had a strong position in the Australian market, but added very high-quality offshore global investment management capabilities giving it arguably a more robust growth profile than most of its peers. JOHCM accounts for about half of the group’s FUM, and three-quarters of operating earnings. The margins on the JOHCM business are twice that of the Australian business.
BTT now has $47.2 billion managed in Australasia (51.7% of FUM), with US$10.5 billion ($13.7 billion) managed in the US, and 18.5 billion pounds ($30.3 billion) managed in UK/Europe. Average FUM has grown at a compound annual rate of 16% over the last five years, while base management fee revenue has grown at 21%.
BTT is generating strong long-term outperformance: 84% of its FUM has outperformed over three years, and 95% has outperformed over 5 years. 41% of BTT’s funds are first-quartile performers over five years; 32% over three years; and 17% over one year. Conversely, 16% of its funds underperform over five years. 14% over three years and 30% over one year (Lipper/Mercer rankings).
With net flows remaining strong, over the longer term the international side of the business will drive upside. Over the past five years, says UBS, performance fees have contributed 16% of revenue and 20% of pre-tax profit. The offshore growth opportunities are very attractive for BTT, and analysts see upside for the stock and an attractive long-term outlook – particularly for the higher-margin JOHCM funds. The yield is also attractive, but not fully franked.
Platinum Asset Management (PTM, $4.68)
Market capitalisation: $2.7 billion
Consensus estimate FY18 yield: 5.5%, fully franked
Five-year investment growth rate: 8.4% a year
Analysts’ consensus target price: $4.20 (FN Arena), $4.20 (Thomson Reuters)
Platinum Asset Management, which also specialises in international shares, has been a major success story under managing director and founder Kerr Neilson, who has built very high brand recognition for Platinum in the retail investor market, and is considered to have built a very distinctive investment culture.
The flagship fund, the $10.6 billion Platinum International Fund, has earned its investors 12.9% a year since inception in April 1995 (to May 2017), almost twice the return of its benchmark (the MSCI All Countries World Net Index in A$), at 6.6% a year. More recently, however, the Platinum International Fund has underperformed the benchmark over three- and five-year periods. Platinum operates 13 funds in total, two of them LICs on the ASX, with $24.4 billion in FUM.
More recently, Platinum’s funds have seen persistent outflows, to the tune of about $500 million in outflows in three months of the June half, according to Morgan Stanley, on the back of sluggish medium-term performance. Total FUM has come down from $28 billion a year ago.
However, in April, Platinum announced that it would cut the standard management fees across its funds from 1.5% to 1.35% (and as low as 1.1%), when combined with the manager’s relative outperformance fee of 15%. The move is one of the most emphatic reactions by a major fund manager to the pronounced market shift toward low-cost “passive” investment: while the fee cut will have an impact on revenue and profit – analysts see it stripping about 12.6% from EPS in FY18 – it could also help to turn around the steady trickle of outflows from Platinum.
Investors will want to see the full-year result in August to get a feeling for the early effect of the fee cuts on revenue and fund flows, but in the meantime, at 18.2 times FY18 earnings, the analysts’ consensus is that Platinum is over-valued. That is reflected in the relatively high yield on offer, on consensus forecasts.
Janus Henderson Group PLC (JHG, $43.18)
Market capitalisation: $4.8 billion
Consensus estimate FY18 yield: 5.9%, unfranked*
Five-year investment growth rate: 28.3% a year
Analysts’ consensus target price: $45.30 (FN Arena), $46.71 (Thomson Reuters)
*company reports in US$
In June ASX-listed international equities manager Henderson Group completed its merger with US-based asset manager Janus Group to form the Janus Henderson Group, which has its primary listing on the New York Stock Exchange (NYSE), but remains traded on the ASX through Chess Depositary Instruments (CDIs). Before the merger, Henderson shares were consolidated, and its shareholders now own one share for every ten they previously owned.
The CDIs give Australian investors arguably their best opportunity to own a global funds management player with strong scale, with about US$330 billion ($434 billion) in funds under management, and a market capitalisation of US$6.5 billion ($8.6 billion). The merged group will boast enhanced distribution and inherits Janus’ relationship with Dai-Ichi Life, the third-biggest player in the life insurance market, and the owner of 15% of the combined group.
Rob Adams, who headed Henderson Group, who is now head of Asia-Pacific for the merged group, has set a target of boosting funds under management from the region by two thirds, to US$100 billion ($132 billion) as soon as possible.
Janus Henderson is definitely in the sweet spot to take advantage of the export growth in Australian funds management. For shareholders the downside is that with CDIs, liquidity can be an issue, as it tends to gravitate to the home market: the institutions will prefer to trade in New York. Also, the dividend is unfranked. But the benefits of the merged group are that the earnings are very high-quality, there is considerable value likely to be extracted, and at 12.3 times consensus expectations for FY18 earnings, JHG compares favourably to its global peers – and it is the Australian funds management stock that is most directly comparable to its peer group. Analysts see solid room for price upside and a strong yield, albeit unfranked.
Blue Sky Alternative Investments Limited (BLA, $9.48)
Market capitalisation: $639 million
Consensus estimate FY18 yield: 3%, fully franked Five-year investment growth rate: 69.46% a year
Analysts’ consensus target price: $8.19 (FN Arena), $8.98 (Thomson Reuters)
Blue Sky Alternative Investments Limited (BLA) specialises in the “alternative” asset classes: its investment funds cover private equity and venture capital, private real estate, hedge funds, and real assets (agricultural businesses, farmland and water entitlements.)
The Brisbane-based alternative asset manager has delivered extraordinary growth in assets under management – from $300 million when it floated in January 2012 to more than $3 billion today. The company has given guidance that reported FUM at the conclusion of the 2016-17 financial year will be between $3.1 billion–$3.3 billion by 30 June 2017, compared to $2.1 billion at 30 June 2016.
Industry tailwinds continue to be highly favourable: according to research group Rainmaker, alternatives are the fastest growing asset class in Australia, and are forecast to become Australia’s largest asset class in the next decade. Blue Sky says it is on track to meet or exceed its longer-term targets of $5 billion in FUM by 30 June 2019, and can “see a pathway” to $10 billion, based on the current opportunities in its four existing asset classes: the expected growth in alternatives is such that it does not expect to need to expand into other alternative asset classes or new geographies – just focus on scaling its existing four asset classes. Although it is a specialist alternatives manager, performance fees currently make up only 25% of revenue.
Blue Sky has certainly lived up to its name on the stock market – floated at $1 in January 2012, its shares traded below $1 until May 2013, but have since cruised to $9.48, taking market capitalisation from $33 million initially to $639 million. On analysts’ consensus, the shares have run ahead of fair value, with the consensus target price showing that analysts expect a pull-back. But Blue Sky has plenty of room for growth, in an expanding market; Australia has the fourth largest holding of alternative assets in the world, at US$275 billion ($362 billion), the largest in the Asian region. In the meantime, there is a 3% fully franked yield on offer.
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