Company Reports

This note replaces the original version that accompanied our report "Industry Pulse - Australian Asset Managers: 2024 Q1," published March 14, 2024. We were recently made aware of inaccuracies in the net flow data for certain unlisted managers in that original report. As for our investment conclusions, we stand by our key assessments: the fair value estimates, moat, uncertainty, capital allocation, and star ratings for our Asset Manager coverage.

Platinum is an active manager founded in 1994, specializing in global equities. It concentrates on identifying unfashionable stocks with latent business and growth prospects. Platinum is not focused on asset allocation and pays little attention to its benchmarks. As a result, its portfolios often look little like—and returns often don’t resemble—their indexes. The firm has about AUD 15 billion in funds under management, or FUM, and is one of the best known fund managers in Australia.

Platinum Asset Management disappointed with an imminent redemption of AUD 1.4 billion in mandated funds from an undisclosed institutional investor, highlighting the challenges faced by active asset managers lacking compelling performance, such as Platinum. The AUD 1.4 billion loss represents 9% of Platinum’s current funds under management, or FUM, of AUD 15.6 billion. This mandate loss, combined with some other anticipated institutional account changes over the next few months, is expected to lead to an AUD 18 million reduction in annual fee revenue.

We recently published our inaugural Industry Pulse: Australian Asset Managers 2024 Q1. It has come to our attention that some the detailed industry data we presented may not be accurate, namely around asset manager inflows and outflows. As far as our investment conclusions are concerned, we stand by our key assessments, namely the fair value estimates and moat, uncertainty, capital allocation, and star ratings for our asset manager coverage. Key data for the companies we cover is captured separately and directly from the relevant companies, and we have no reason to believe it is incorrect. However, while we investigate to confirm the accuracy and presentation of the detailed underlying data, we have retracted the report from our products. We will seek to reissue a corrected report, along with an explanatory accompanying note, as soon as practical.

Share prices of ASX-listed asset managers fell for most of 2023 but broadly rebounded late in the year in anticipation of lower interest rates. Stabilizing interest rates generally enhances investor risk appetite, thus boosting fund flows, asset prices, and earnings for asset managers. Globally, net annual fund flows into open-ended, money market, and exchange-traded funds turned positive in March 2023 after close to six months of net outflows. This reflects a stabilizing US federal-funds rate and an increased likelihood of rate cuts in 2024. In Australia, the prospect of cuts in the Reserve Bank of Australia’s cash rate in the near term is likely positive for flows into Australian-domiciled funds—consisting of ETFs, industry funds, and active managers.

No-moat Platinum is facing earnings contraction due to prolonged relative underperformance, shrinking revenue, and cost growth. First half fiscal 2024’s underlying net profit after tax fell 5% from the previous corresponding period as revenue declined, reflecting lower funds under management. Profitability in the core funds management division has further deteriorated, with net profit margins now at 34%, down from 36% in the PCP and well below 59% around a decade ago.

Platinum is an active manager founded in 1994, specializing in global equities. It concentrates on identifying unfashionable stocks with latent business and growth prospects. Platinum is not focused on asset allocation and pays little attention to its benchmarks. As a result, its portfolios often look little like—and returns often don’t resemble—their indexes. The firm has about AUD 15 billion in funds under management, or FUM, and is one of the best known fund managers in Australia.

Our conviction in the thesis for listed wealth managers, asset managers, and their related service providers has strengthened after gathering insights from the recent 2023 Super & Wealth Summit, hosted by the Australian Financial Review. These firms are influenced by similar business drivers and industry trends. Most derive their revenue from funds under management and/or administration, or FUMA, which are driven by asset price movements and new fund flows from clients, and management fees or commissions on these FUMA.

The Platinum team, founded by the illustrious Kerr Neilson and Andrew Clifford in 1994, is well regarded by many. But that regard did not prevent falling earnings and net outflows for much of the last five years.

Narrow-moat Platinum Asset Management demonstrated a strong start for the first half of fiscal 2021, with NPAT improving by 14% to AUD 90.4 million, relative to the prior corresponding period, or pcp. Most of the asset manager’s strategies outperformed over the year to January 2021, supported by the recent stock price appreciation of cyclical and deep value stocks following promising vaccination news. Growth in the value of its seed investments, an AUD 3.7 million performance fee and a decrease in costs helped offset the 12% decline in management fees over the half, from lower average FUM.

We marginally increase our fair value estimate on narrow-moat Platinum Asset Management to AUD 3.75 from AUD 3.60 previously, after revising our normalised market return assumptions and incorporating the time value of money. The asset manager’s shares screen as fairly valued at current prices, offering a fiscal 2021 dividend yield of 5.7%.

Platinum’s earnings have been hamstrung in recent years by its inability to meaningfully increase its funds under management, or FUM. We think several factors are at play in explaining the disappointing FUM growth which we expect will continue to contribute to subdued near-term growth. Primary among the reasons is poor short- to medium-term performance from its flagship International fund relative to its benchmark.

Following the COVID-19 outbreak, equity markets are likely to remain volatile over the near term unless there are clear signs that the virus is successfully contained on a global scale and economic stimuluses are effective in limiting the severity of a global downturn. Revenue will be under pressure for asset managers Magellan Financial Group and Platinum Asset Management, which derive fee revenue from managing global equity portfolios. This includes base management fees that should reduce on the lower value of assets under management and performance fees that are likely to fall sharply.

After three straight years of strong profit growth, the ride came to a temporary end, with Platinum Asset Management’s fiscal 2016 profit down 6% to AUD 200.9 million. While a more subdued second-half performance was expected, the result disappointed, missing our forecast by 11%. While revenue was slightly behind our expectations, down 4.4%, costs growth of 6.3% was higher than expected. While we can appreciate staff incentives are required to reward, retain, and motivate good people for positive contributions, in a tough period for the group, we had hoped for greater cost constraint. We do not see investments in the business as wasteful and they should bear fruit in the future, particularly the seeding of three UCITS (mutual funds based in the European Union) to attract offshore institutional money. The final fully franked dividend of AUD 16 cents per share takes full-year distributions to AUD 32 cents, down from AUD 37 cents last year which is a result of lower earnings and Platinum lowering the payout ratio to 93%.

Platinum Asset Management's funds under management, or FUM, was modestly lower at the end of March 2016, down AUD 78 million to AUD 24.74 billion. With the MSCI in Australian dollars down 0.3% during the month this is not surprising, but with most funds, and in particular the Platinum International Fund up 0.9% in the month, it implies that the asset manager incurred modest outflows. What is more disappointing is the announcement of a lost institutional mandate. Platinum has been advised that during April 2016 a U.S.-based institutional client intends to terminate an AUD 1 billion account. This will reduce FUM by 4% to AUD 23.74 billion, but as it earns a lower base management fee on institutional FUM, the outflow will have a smaller impact on revenue.

A strong brand, a track record of investment outperformance, a prudent management team, a sound balance sheet, and a high dividend payout make Platinum Asset Management an attractive long-term investment, particularly against a backdrop of growing superannuation assets in Australia and increasing allocation to international equities. Population growth, increased pension age, and increases to compulsory superannuation rates will all contribute to substantially expanding the pool of Australian superannuation assets during the next 10-15 years. Trading at a 25% discount to our AUD 8.50 fair value estimate, Platinum is our preferred exposure among the ASX-listed asset managers we cover. While we acknowledge that there are several risks, including fund underperformance, loss of key personnel, and pressure on fees, we believe Platinum is well positioned to meet these challenges, and that it looks attractive on a fiscal 2017 price/earnings ratio of 14.5 times and a fully franked dividend yield of 6%.

Platinum's funds under management, or FUM, fell 1.55% during December 2015, attributed to weaker equity markets globally. The MSCI All Country World Index in Australian dollars declined by 2.2% in December. Platinum's investment performance can diverge from the index performance though, with weightings by region very different in its portfolios to relevant benchmarks. The U.S. makes up 53% of the MSCI All Country World Index with China only 2%, whereas Platinum's flagship International Fund has a net 10% weighting to the U.S. and 20% to China. Platinum's investment exposure is to the Chinese consumer and not manufacturing, with its investment case largely pinned on growth of middle class disposable income which can be tapped into via relatively reliable and (what it views as) cheap Chinese businesses. While the consumer story is acknowledged by most, Platinum sees it as being mispriced as a result of uncertainty around the country's transition from construction to consumption.

Platinum's 12.4% increase in net profit after tax, or NPAT, to AUD 213.5 million was slightly better than expected. The AUD 25 million fall in performance fees was more than covered by a AUD 53.5 million increase in management fees, but the result would have been a slight miss had it not been for a non-cash gain of AUD 16.6 million on U.S. dollar cash balances. While equity markets are creating short-term uncertainty, we believe momentum is positive, with decent inflow from retail investors and improved distribution effort in Australia and globally supportive of future growth.

After a record prior year Platinum Asset Management's performance fees vanished in first-half fiscal 2015, and we don't believe performance fees will feature in the second half either. Potential performance fees to be made in the first half are tied to absolute performance mandates, while Platinum has relative performance mandates which are paid in the second half. The majority of these mandates are in the International Fund, which has underperformed its relative benchmark by almost 2% during the first 10 months of fiscal 2015. Even though Platinum's International Fund has delivered 23% per annum over the past three years, Platinum does not follow index weightings, so should its investment strategy to have a greater allocation to Asia (more than 40% of the portfolio) than the United States (14%) prove correct, it should deliver substantial outperformance in future years.

After a bumper haul of performance fees helped first-half fiscal 2014 profit surge 68%, we are not surprised to see Platinum Asset Management report a small decline in first-half fiscal 2015 earnings. We previously noted short-term performance of its funds would see the AUD 24 million in performance fees, or 15% of last year's total revenue, vanish. However, with tailwinds of rising equity markets and a falling Australian dollar, this well-run asset manager continues to position itself nicely for the long term. This is not a weak result, with average funds under management, or FUM, and base management fees up 14% to AUD 24.3 billion and AUD 149 million respectively. Cycling a strong prior period, pretax profit was flat, with only a bigger tax bill leading to net profit after tax being down 4% to AUD 100 million.