Funds management – especially those that are listed companies on the Australian Securities Exchange (ASX) is an interesting business, given that the service it provides is skill and expertise of professional investment portfolio managers. There are large relatively fixed costs to this business; the fund managers need to be paid (that’s a very competitive business); so do the support staff, who take care of things such as compliance, custody and administration; and so does rent.
Once these costs are covered, managing investors’ money can be highly profitable; and it is a ‘scalable’ business, in which revenue rises as more dollars come in the door. But the flipside is that if more dollars flow out the door – for instance, if the fund manager’s funds don’t perform well against their peer funds, and annoyed investors (especially institutional) withdraw their money and take it elsewhere – revenue slides.
The crucial figures are funds under management (FUM); net client flows (whether FUM is rising or falling in a given period); movement in the underlying asset values, which also acts to increase or decrease FUM; and the margin on assets.
In a competitive market, in which managers’ performance against its cohort group – the managers that manage peer-group funds – once relative performance is seen to fall, it can be a very testing time for a manager. Active managers are already looking over their shoulders at the wave of ‘passivisation’ that has seen Australian investors swell the market capitalisation of exchange-traded funds (ETFs) to $184.5 billion, from just $48 million on their introduction in 2001. If investors (and more importantly, their advisers) lose faith, they will extract their money and go elsewhere – either to a passive investment, which will at least give them the asset-class return, or to a competitor fund.
Some of the funds management companies also have large dollops of key-person risk, where the senior portfolio managers, who are often the founders of the companies, become identified with the company. Australia has imported the US notion of the “star stockpicker” – for good or worse. Meaning, that performance, and people, can be good influences for a funds manager, and its share price, but they can also be bad influences, in the arena of sentiment around a stock.
Consider Platinum Asset Management. It was founded in 1994 by Kerr Neilson as chief investment officer and Andrew Clifford as the deputy chief investment officer, after the pair had worked together for several years at Bankers Trust. Platinum Asset Management listed on the ASX in 2007.
The main problem was that some of Platinum Asset Management’s strategies, in particular the flagship International Fund, ran into performance difficulties – and that hurt funds under management, performance fees, and profits.
When Platinum listed, it had $21.7 billion of funds under management, a number that peaked at $29.4 billion in May 2015. It now has about $15 billion. And the share price reacted: the funds management company’s share price (ASX: PTM) fell from a peak of $9.15 in February 2015, to $1.01 in February this year, before recovering somewhat, to $1.32.
Behind the scenes of the performance issues, Neilson stepped down as CEO in July 2018, and Clifford stepped-up as CEO, while also retaining his role as co-chief investment officer (co-CIO). In November 2022, Neilson left the board, but he remains Platinum’s largest shareholder, with 21.5% of the stock. At some point, Neilson began pushing for Andrew Clifford to step down as the fund manager’s chief executive: that happened in August 2023, although Clifford remains co-CIO. (Although Neilson was also chief executive and chief investment officer at the same time, as the largest shareholder he wanted the roles split.)
Or take Magellan Financial Group, where FUM peaked at $116 billion in November 2021, as the company rode the pandemic boom in growth stocks under the leadership of co-founder, chairman and former chief investment officer Hamish Douglass, who was considered a rock-star stock-picker by the financial media.
But things got messy. In December 2021, Magellan Financial Group chief executive Brett Cairns left the company in a surprise departure. Just days later, Hamish Douglass and his wife confirmed their marital separation. Then, mid-month, British wealth management group St James Place pulled its $23 billion from Magellan – the firm’s biggest institutional mandate.
At the time, investors were already unnerved by 12 months of investment underperformance – the same as Platinum, in particular the flagship international fund – and St James Place’s very public decision not to back the Douglass strategy immediately stripped one-third from the share price and market capitalisation. The management fees from St James Place contributed 12% of revenue. Douglass left the company in February 2022.
Magellan Financial Group (MFG) shares transcribed a shocking pullback, from $65.48 in February 2020 to $6.22 in October 2023. Like Platinum, the shares have managed a partial rebound, to $10.33 now – in fact, they are on a tear, up 22.8% in the last month.
Magellan’s FUM slipped as low as $35 billion, but it now manages $37.2 billion in FUM as at 29 February, up from $36.3 billion at the end of January; the FUM is split $17.7 billion in retail funds, and $19.5 billion on behalf of institutions. But outflows are still an issue: in February, Magellan still witnessed $200 million of net outflows from its customers.
Although there is plenty of serious investment talent running the money at Magellan and Platinum, the two big global fund managers will take a long time to build FUM to anywhere near their peaks; and the same goes for the share prices. The market feels burned by the pair.
Here’s what the analysts have to say about each:
Platinum Asset Management (PTM, $1.315)
Market capitalisation: $742 million
12-month total return: –14.6%
3-year total return: –29.8% a year
FY25 estimated yield: 6.8%, fully franked (grossed-up, 9.8%)
FY25 estimated price/earnings (P/E) ratio: 14.1 times earnings
Analysts’ consensus target price: $1.11 (Stock Doctor/Refinitiv, 11 analysts)
Magellan Financial Group (MFG, $10.33)
Market capitalisation: $2.1 billion
12-month total return: 37.7%
3-year total return: –32.4% a year
FY25 estimated yield: 5%, 70.1% franked (grossed-up, 6.6%)
FY25 estimated price/earnings (P/E) ratio: 14.7 times earnings
Analysts’ consensus target price: $8.33 (Stock Doctor/Refinitiv, 11 analysts)
In the market’s view, the respective share price recoveries have already pushed PTM and MFG well past what should be considered fair value.
However, let me suggest where an investor could look among the listed global funds managers – GQG Growth.
GQG Partners (GQG, $2.11)
Market capitalisation: $6.2 billion
12-month total return: 59.9%
3-year total return: n/a
FY24 (December) estimated yield: 8%, unfranked
FY24 (December) estimated price/earnings (P/E) ratio: 11.6 times earnings
Analysts’ consensus target price: $2.38 (Stock Doctor/Refinitiv, six analysts)
GQG Partners is a US-based boutique global asset management firm, managing long-only share portfolios across four core strategies: global shares; international shares; emerging markets shares; and US shares.
The company was co-founded by chief executive officer Tim Carver, who holds 5.6% of the company, and executive chairman and chief investment officer Rajiv Jain, who holds 68.8%. The one big issue that some investors have with GQG is the perceived key person risk: Rajiv Jain is either portfolio manager or co-portfolio manager across all of GQG’s US$137.5 billion ($211.5 billion) in FUM. If Jain was suddenly not managing that money, it would probably cause a big chunk of FUM to leave.
But at the moment, GQG (it stands for Global Quality Growth) is raking in money.
In the year to 29 February, GQG increased its FUM by more than half, from US$90.8 billion ($139.7 billion) to US$137.5 billion ($211.5 billion). It has received net inflows of US$4.9 billion ($7.5 billion) in 2024 so far.
That is largely because the company has done very well riding the rise, fall and renewed surge of the global tech sector. GQG’s flagship global equity fund delivered a 49.1% return, net of fees, in the year ended January, 21.9 percentage points (79%) better than its benchmark index, and over the past five years has delivered 18.8% a year, net of fees, or 5.9 percentage points (47% better performance than its benchmark).
And as The Australian Financial Review pointed out, the fund has delivered this outstanding performance while being managed for significantly less than its major competitors: GQG’s weighted average management fee of 48.8 basis points compares to 70 basis points at Magellan, and 112 basis points (1.1%) at Platinum.
And when you’re performing well, the profits roll in.
In FY23 (GQG uses the calendar year as its financial year), FUM grew by 37%, to US$120.6 billion ($185.5 billion), of which net inflows contributed US$10 billion ($15.4 billion) and investment performance contributed US$22.6 billion ($34.7 billion). Of that investment performance, US$7.4 billion ($11.4 billion) came from excess returns above benchmarks.
For the year, management fees increased 16.8%, to US$497.8 million ($765.8 million), with a management fee margin of 48.9 basis points (0.489%), up from 48 basis points. Performance fees contributed US$19.7 million ($30.3 million).
There is plenty of key-person risk – and GQG knows that eventually it will have to manage the succession process around Rajiv Jain – and there is also risk that the performance might cool off. Clearly, the short-term direction of the share market has a major influence on GQG’s FUM levels, inflows/outflows – and share price. But GQG is well-placed to benefit from improved markets, the addition of new strategies and areas; for example, GQG is looking to expand in private markets (equity and credit). There is also an attractive yield projected on the shares at the moment, albeit unfranked. While Magellan and Platinum clean up their houses, GQG looks a good option for investors.
Disclaimer: in London in July 2023, Mark Barker, managing director, international, of GQG Partners took me to lunch at Boisdale restaurant in Belgravia, and paid for it.
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 regard to your circumstances.
