Catching the Wealth Wave

Led by the resurgent AMP (see today's interview with Robert Gottliebsen), wealth management companies are well placed to benefit from a range of positive factors set to combine later this year.

Market traders tired of chasing returns in the fully priced commodity stocks have begun "rotating" towards wealth management companies, gambling that finance stocks are set to enjoy renewed investment as investors swarm into the stockmarket on the back of last year's peak performance of an 18% return.

Stockbrokers dub the inflow of retail investors as the "nine-month lag". If history proves correct, the nine-month lag should feed through to finance stocks in the second half of this year.

Whether you believe this market theory or not, wealth management companies have plenty to smile about. The money is washing in from the commodities boom (net inflows in were more than $6 billion for the September quarter); legislative changes to super will guarantee future profits; and the good times look set to roll for some time yet. Two tax-related changes are fuelling the wealth management sector:

• First, the abolition of the superannuation surcharge is already flowing through to the bottom line of many funds. Since July 1, 2005, high income earners have no longer been subject to a surcharge of up to 12.5%. A substantial slice of what was previously siphoned off by the Federal Government in tax now flows directly into the stockmarket.
• Second, changes to regulations regarding super co-contributions by spouses are also expected to have a significant impact. Since January 1, 2006, couples have been permitted to split superannuations contributions. For many households with one partner earning a much higher salary than the other this means a couple may double their super contributions before reaching their reasonable benefit limits or RBLs.

Lump-sum payouts currently have an RBL of $648,946 '” with contribution splitting a couple (or household) could double this threshold to more than $1.2 million. Those who opt for an allocated pension have an RBL of $1,297,886; under the new regulations this can double to almost $2.6 million per couple.

The simple change to superannuation splitting could generate substantially bigger profits for financials for many years to come and, increase the flow of funds into wealth management operations.

Despite the improved outlook for wealth management companies, a few could be described as pure plays. More commonly, finance stocks such as banks have wealth management activities '” particularly fund management operations '” as part of their business. The table below offers a selection of 14 leading financial stocks, many of which offer high dividend yields and generous franking.

HOW THE WEALTH MANAGEMENT COMPANIES ARE PERFORMING
	Share price ($)	P/E ratio	Price to market ratio	Dividend Yield (%)	Franking (%)
AMP	8.38	16.4	1.09	3.82	75
ANZ	24.75	15.4	1.03	4.44	100
AUW	2.06	58.8	3.92	n/a	n/a
AXA	5.31	15.9	1.06	2.37	30
CBA	43.50	13.8	0.92	4.68	100
CGF	3.92	18.7	1.25	1.27	100
IFL	7.42	7.3	0.49	2.97	60
NAB	35.56	14.0	0.93	4.68	80
PMN	5.27	11.5	0.77	4.30	100
PPT	69.50	22.0	1.47	3.78	100
QBE	19.01	13.9	0.93	4.06	50
SGB	30.07	18.8	1.25	4.56	100
WBC	23.10	15.9	1.06	4.35	100
All figures quoted are accurate as of close of trade Friday February 17 2006 * Price to Market Ratio is calculated assuming the ASX 200 has a PE of 15

The recovery of AMP following the demerger of its UK operations has been one of the biggest stories within the finance sector in the past year. AMP's share price has doubled in the past 24 months. On February 16, AMP reported a 24% increase in underlying net profit, from $645 million to $801 million for calendar 2005.

As AMP chief executive Andrew Mohl tells Robert Gottliebsen in today's Eureka Report: "We captured 24¢ of every dollar flowing into superannuation last year". After its success in corporate super, AMP is expected to aggressively pursue a larger share of the retail super market over the next 12 months.

AXA Asia Pacific has been very busy recently making various foreign acquisitions which last week included 100% of MLC Hong Kong and MLC Indonesia for $550 million. The move into Asia and New Zealand was accompanied by the February 21 announcement of an 18% rise in profit, from $459 million to $542 million for the year.

However, AXA and AMP still drag behind the broader financial sector in terms of dividend payouts: AXA's dividend yield is 2.37% and franking at 30%; while AMP's yield isf 3.82% and franking of 75%. Most leading banks pay a dividend yield of about 4% and 100% franking.

Three dedicated wealth management companies are Perpetual (PPT), IOOF (IFL) and Australian Wealth Management (AUW). Perpetual's half-yearly results, released on February 22, were slightly disappointing. Net profit increased by 13%, from $65 million to $73.5 million. Despite its price/earnings (P/E) multiple of 22 and its price to market ratio of 1.47, Perpetual is still struggling to make money from its international operations centred in Dublin.

At the smaller-cap end of the market is the boutique funds manager IOOF (IFL). Its price to market ratio of 0.49% suggests the stock still has some way to go before it levels off with the rest of the financial sector. On February 21, IOOF announced its half-yearly results with a 64% increase in net profits, from $6.2 million to $10.2 million. Over the same period, funds under management grew by 13% to $25 billion.

On the other hand, Australian Wealth Management (AUW) is one of the more expensive dedicated wealth management stocks listed, with a P/E of almost 60. Leading wealth management companies more commonly enjoy a P/E of 14–15. Australian Wealth Management debuted on the ASX on February 16, 2005, at $1.21. At the close of trade a year later, on February 17, 2006, it was $2.06.

And then of course there are the biggest players in the market: the banks.

The Commonwealth Bank (CBA) and the National Australia Bank (NAB) have more than $100 billion worth of funds under management between them. CBA accounts for $55 billion and NAB for about $50 billion. In recent years banks have purchased their own financial planning companies (Colonial First State and MLC respectively) from which to sell their products.

Both banks have P/Es of about 14 '” slightly under the market average '” and identical dividend yields. of 4.68%. NAB accounted for 16.6% of flows into wealth management for the September quarter, second only to AMP, which snared 17.6% for the same period. On February 15, CBA announced a record half-year net profit: an increase of 18% to $2 billion, up from $1.7 billion in the previous corresponding period. On August 10, 2005, CBA announced an increase of net profit of 31%, from $2.7 billion to $3.5 billion after tax. On Novermber 9, in its full-year profits for 2005, NAB announced a net profit up 30% from $3.2 billion to $4.1 billion.

The other two banks, ANZ (ANZ) and Westpac (WBC) are about the same size, have P/Es that are about 5% higher than the market and dividends of about 4.4%, which are both 100% franked. Westpac, however, has now fully integrated funds management company BT into its wealth management division with a focus on wrap accounts. ANZ has been criticised for being underweight in wealth management despite launching a joint venture with ING to improve its position.

On October 25, 2005, ANZ reported a rise in full-year net profit of 7.2% from $2.8 billion to $3 billion. It the same announcement, it responded to criticism it was underweight in wealth management by saying: "There is nothing to buy at the moment". On November 3, Westpac reported an 11% rise in net profit from $2.5 billion to $2.8 billion for the same period.