Opportunities Abundant in Diversified Financials; Firms Adapting to Industry Changes

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.

Most asset managers and related firms under our coverage are undervalued, with an average discount of 21%. Investors are overly fixated on headwinds that are mainly cyclical while underestimating the potential for improved earnings as business conditions normalize. Fee compression will persist as firms strive to remain competitive when faced with larger rivals like industry super funds that are growing in size through mandated super contributions. We also see ongoing cost-outs as firms keep pace with competition and retain client assets. We also think firms with a diverse product portfolio have a relatively greater ability to attract and retain client assets.

We retain our fair value estimates for wealth management providers AMP, Hub24, Insignia, and Netwealth at AUD 1.35, AUD 24.50, AUD 3.40, and AUD 10.10 per share, respectively. Likewise, our fair value estimates for asset managers Challenger, GQG, Magellan, Perpetual, Pinnacle, and Platinum remain at AUD 7.30, AUD 2.00, AUD 9.60, AUD 27.50, AUD 11.00, and AUD 1.90 per share. Lastly, we maintain our fair value estimates for related service providers Iress and Link at AUD 9.20 and AUD 1.50. Among these 12 firms, only Pinnacle, Perpetual, Iress, and Link have narrow economic moats, while the rest have no moat.

We favor Insignia among the wealth management providers and prefer Pinnacle, Perpetual, and Challenger among the asset managers. Iress is our pick among the related service providers.