Super profits from super companies –Platinum, Macquarie

Chief Investment Officer and founder of Aitken Investment Management
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I have the view that the biggest money making idea in Australia over the next decade is actually wealth management.

The compulsory superannuation contribution rate rose from 9.00% to 9.25% on July 1 2013, and is set to rise to 12.0% by July 2021. Superannuation savings are forecast to reach $7 trillion by 2030!

Forecast: To reach $7 trillion by 2030

Offshore opportunities

Australians will have to start allocating more of the super pool to offshore investments.

I don’t think the all-powerful SMSF army will sell their beloved CBA to fund offshore investment rotation. I believe what we will see is dividends start being reinvested elsewhere to increase diversity as the AUD/USD corrects back to the long-term trend.

Australian superannuants, due to nuances in the Australian taxation system (franking credits), will always have a major home bias towards asset allocation. However as the currency corrects, concurrently with value being harder and harder to find in Australian assets (yield compression), you will see the international investment allocation start increasing (from a very low base).

Similarly, Australian domestic investment themes are relatively narrow, with entire industries not represented, or, in many cases, sparsely represented.

The average SMSF investor is still majority exposed to Australian dollars (AUD), a decision that has, and will continue to be, a mistake. It’s worth remembering in year-to-date US dollar performance, the ASX200 is flat, while the Nikkei is up 27.5% and S&P500 26.6% in US dollars (USD).

My strong view remains that the AUD/USD is headed to 80US cents and to preserve and grow wealth in global dollars, but particularly US dollars, all Australians should be either directly, or indirectly, increasing asset allocation to US dollars. From what I can see in the data, the median SMSF has very little or no direct international exposure.

To truly benefit from what I write above, you physically have to get your money out of Australia into US dollar assets.

Star performance

In my view, there are five listed companies excellently positioned to harvest this structural wave of exported investment capital as it grows in size. All have established offshore fund performance and the capacity to manage significantly higher pools of international money.

Those five stocks are Platinum Asset Management (PTM), Macquarie Group (MQG), AMP (AMP), K2 Asset Management (KAM) and BT Investment Management (BTT). I have left Magellan Financial Group (MFG) off that list, not because it doesn’t have leverage to the theme, but because on nearly a 50% P/E premium to its peers, it is already discounting future growth, yet short-term fund performance appears to be stalling. The five stocks above appear to be gaining fund performance/outperformance.

I think all five will experience a multi-year EPS/DPS and P/E upgrade cycle, as the market comes around to my view of Australia exporting superannuation. I believe all five could be takeover targets, through time, from offshore fund managers looking for leverage to this structural growth.

My view is short, medium and long term EPS/DPS and P/E estimates for these companies are too low. Yes, they have rallied in the last 12 months, as markets have bounced, but no P/E has been added. As it becomes evident to all that Australians have to start exporting part of the super pie, the re-rating will start. The chart below of the purest play on this theme, PTM vs. consensus FY14 EPS forecasts, confirms that view.

PTM vs. FY14 consensus EPS

There is one more potential positive near-term regulatory risk in the wealth management sector that would see P/E added, and that is the following draft legislation:

  1. The Fair Work Commission could lose the power to select default super funds in employment awards;
  2. The boards of superannuation funds to move to third independent, third employer and third union (currently half employer and half union groups).

The above two changes, if adopted, will have serious ramifications to how default awards are selected in Australia. To put things in perspective, the changes will effectively open up, to proper competition, 20% of Australia’s superannuation market that is current dominated by Industry funds. The single biggest beneficiary of this change will be AMP (which is the largest retail and corporate super player in Australia) and has the product scope ready to target a part of the market that has been effectively closed off to them.

In addition, the Federal government has provided a timeline to unwind the red tape surrounding the Future of Financial Advice (FOFA) reforms, particularly around the unpopular opt-in requirements. Again, this will benefit the players with large financial planning networks the most. The largest of which is AMP.

So not only does the sector have legislated growth, it has further positive regulatory risk. That is the complete opposite of the previous five years.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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