4 investment managers and their funds
Investors often ask whether they are better off owning one of the listed funds managers, or investing in the funds that the company manages.
It’s an interesting question, because you’re on different sides of the business. If you invest in the unlisted funds – or even the listed investment companies (LICs), listed managed funds or exchange-traded funds (ETFs) that some of the managers have – you’re a beneficiary of the fund manager’s skills. If you invest in the listed operating company – the “headstock” – as a part-owner of that business, you provide those skills to the fund investors.
The simplest distinction is that investors in the unlisted funds pay management fees – and sometimes, performance fees – and investors in the listed business benefit from these fees.
The headstock effectively acts as a “leveraged play” on owning units in the underlying fund. If the fund outperforms the market, and attracts more investors and advisers to use it because of that, the listed stock should generate higher returns than investors in the underlying fund receive. Asset managers usually benefit from low capital intensity (requirements) and high operating margins. The major listed managers typically have strong brands, sound long-term investment track records and – usually – have growing funds under management (FUM), or at least “sticky” FUM that they retain. They are usually seen as high-quality franchises.
But while investors in the unlisted funds or LICs live and die on the investment returns the managers generate, the investors in the headstocks have business issues overhanging their investment. For example, how much they pay their people – what are staff costs as a percentage of revenue – what are expenses, is FUM rising or falling for any reason, is any fallout from the financial services Royal Commission affecting the share price, has the company made any acquisitions and how are these performing? The kind of issues that affect every listed business can affect the listed funds management headstocks.
This means that the share prices of the headstocks can fluctuate much more than the unit-price performance of the funds. That reality can, at times, deliver the kind of leverage to a well-timed purchase of the headstock, that can turbo-charge returns.
Let’s look at some of the major funds headstocks and their performance.
1. Pendal Group Limited (PDL:ASX)
Market capitalisation: $2.4 billion
FY19 forecast yield: 6.2%, 20.4% franked
Analysts’ consensus target price: $10.75 (Thomson Reuters), $10.76 (FN Arena)
1-year total return: –20.6%
3-year total return: –0.7% a year
5-year total return: 19.1% a year
The former BT Investment Management is on track to report a strong FY18 (Pendal Group has a September 30 balance date) despite a wobbly performance in FUM flows. The problem there is the group’s international operation – the UK-based JO Hambro Capital Management (JOHCM) – which accounts for more than 75% of total management-fee income. At the moment JOHCM is losing money – that is, it has net outflow of FUM – which the company says is being driven by asset allocation decisions by major investors, but also correlates to fund under-performance. However, the JOHCM business generates higher margins than the Australian operation.
For the half-year to March 2018, Pendal reported a 30% jump in cash net profit to a record $114.5 million, and declared an interim dividend of 22 cents a share (15% franked), up 16% from last year. It is the sixth consecutive year that the company has increased its interim dividend. For the full year, analysts expect a 14% lift in earnings per share (EPS) to 63 cents, with the total dividend rising 6 cents (13%) to 51 cents.
The Pendal headstock’s recent – one and three-year – performance stands in stark contrast to its main funds. However, over five years, the headstock was the better performer.
Pendal’s main Australian Equity Fund
1-year total return: 16.1%
3-year total return: 11.3% a year
5-year total return: 9.4% a year
Pendal Focus Australian Share Fund
1-year total return: 16.5%
3-year total return: 13% a year
5-year total return: 11.2% a year
Pendal Global Share Fund
1-year total return: 17.6%
3-year total return: 10% a year
5-year total return: 13.5% a year
This is where the leverage of a well-timed purchase of the headstock – which has fallen by 24% this year – can come into play. Analysts’ consensus price targets for Pendal imply very solid capital gains from here.
2. Janus Henderson Group plc (JHG:ASX)
Market capitalisation: $7 billion
FY19 forecast yield: 5.8%, unfranked
Analysts’ consensus target price: $46.22 (Thomson Reuters), $46.65 (FN Arena)
1-year total return: –15%
3-year total return: –10.3% a year
5-year total return: 6.3% a year
The global Janus Henderson group’s ASX-listed headstock has also had a troubled year, being down 26% from the $49.20 share price at the start of year. Comparing the headstock to the group’s Australian equity fund shows that investors would have been much better off in the fund than in the stock in recent years.
Janus Henderson Australian Equity Fund (as at 31 August 2018)
1-year total return: 17.7%
3-year total return: 11.3% a year
5-year total return: 9.4% a year
Janus Henderson Group is a global asset manager listed on the ASX and NYSE. In 2017 the London based Henderson Group – which was created after its spin-off from AMP in 2004) – merged with US-based Janus Capital to form Janus Henderson. The two are complementary businesses, in that Henderson is strong in Europe and the UK while Janus is strong in the US and Japan. Henderson has an excellent record in equities and ‘alternative’ asset classes, while Janus is strong in fixed-income and ‘quantitative’ investing. This means that the merged business has great opportunities to become more than the sum of its parts, as its distribution teams cross-sell in their respective markets.
Investors in the ASX-listed JHG should be able to benefit from this, and that should go a long way toward redressing the lag in the headstock price compared to the funds. Australian analysts’ consensus price targets imply strong upside.
3. Magellan Financial Group (MFG:ASX)
Market capitalisation: $4.8 billion
FY19 forecast yield: 5.6%, fully franked
Analysts’ consensus target price: $29.00 (Thomson Reuters), $28.61 (FN Arena)
1-year total return: 15.3%
3-year total return: 16.3% a year
5-year total return: 25.7% a year
Magellan Financial Group (MFG) has lagged its own funds over the last 12 months – but has outperformed them convincingly over the last five years.
Magellan Global Fund
1-year total return: 27.3%
3-year total return: 11.4% a year
5-year total return: 15.5% a year
Listed managed fund: Magellan Global Equities Fund (MGE:ASX)
1-year total return: 27.2%
3-year total return: 11.5% a year
MFG has risen marginally in share price this year – and in the FY18 result, profit rose by 37%, ahead of market expectations. FUM at the beginning of FY19 was 18% above the average level for FY18. Earlier this year, Magellan – which has been globally focused, through its flagship Magellan Global Fund – added Australian equities capability for the first time, by buying John Sevior’s Airlie Funds Management, and launching Airlie’s Australian Share Fund to retail investors in July.
Magellan has been mostly invested in the North American share market. It has about 75% of FUM invested in US shares, with an overweight exposure to technology stocks. The Chief Investment Officer and Lead Portfolio Manager of Magellan’s global equities strategies Hamish Douglass certainly “eats his own cooking” – he is the largest shareholder in the company (with 12.6%) and is also invested in its funds.
Magellan Financial Group impressed investors in the FY18 result by lifting its dividend payout ratio to 90%–95% of funds management earnings, from 75%–80%, and 90%–95% of performance fees – it had no policy on this before. The company is getting excellent results from its principal investment operations (the money it invests on its own behalf) and analysts expect this to continue, as well as lower funds management costs. Funds under management increased 20% in the second half of FY18 – although the Airlie acquisition had a lot to do with that – and positive markets also helped.
Net inflows continue to point in the right direction. In August, net inflows lifted FUM by 0.4%, in the third consecutive month of inflows. Total FUM increased by 6.6% (or $4.6 billion) to $74.6 billion during August. In short, Magellan has been a very robust performer – but for investors looking at the sector now, it doesn’t appear to offer the same value as the others. However, a 5.6% fully franked yield – equivalent to 7.5%, grossed-up – does make MFG a yield portfolio candidate.
4. Platinum Asset Management (PTM:ASX)
Market capitalisation: $3.1 billion
FY19 forecast yield: 5.9%, fully franked
Analysts’ consensus target price: $5.30 (Thomson Reuters), $5.33 (FN Arena)
1-year total return: –9.5%
3-year total return: –3.0% a year
5-year total return: 4.7% a year
The Platinum headstock, PTM, is down 31% so far in 2018 – and analysts don’t think much of its prospects of turning that around anytime soon. This is one situation where investors would definitely have been better off in the funds.
Platinum International Fund (C Class units)
1-year total return: 10%
3-year total return: 9.6% a year
5-year total return: 11.7% a year
Platinum Asia Fund (C Class units)
1-year total return: 11.5%
3-year total return: 10.5% a year
5-year total return: 13.7% a year
LICs:
Platinum Capital Limited (PMC:ASX)
1-year total return: 10.7%
3-year total return: 9% a year
5-year total return: 11.3% a year
Platinum Asia Investments Limited (PAI:ASX)
1-year total return: 14.6%
Platinum Asset Management’s over-arching philosophy differs significantly from its major competitor Magellan. Platinum takes the view that the rise of the Asian middle class is the biggest investment opportunity of our lifetime. Asian stocks feature much more prominently in the Platinum portfolios than in those of Magellan.
In FY18, FUM rose by 13% to $25.7 billion, but ended 5% lower than at December 2017. On net terms, inflows for the financial year were $1 billion. EPS was up 2% to 32 cps; the fully franked dividend was up 2 cents (6.7%) to 30 cents.
Brokers are not enthused about the stock – as Credit Suisse puts it, fund performance is struggling and will hinder Platinum’s ability to earn performance fees in FY19 – but a 5.9% prospective yield (grossed-up, 8.4%) will appeal to income-oriented investors.