New opportunity at Perpetual

PORTFOLIO POINT: I have great optimism about Perpetual’s prospects. It is likely to emerge from the bear market leaner and more humble.

This week high-profile fund manager Perpetual announced the surprise departure of chief executive Chris Ryan. His exit, after just 12 months, says much about the health of the financial services industry at present and the need for urgent change.

Those that don’t embrace that need for urgent change are likely going to be left behind.

Market conditions have been unfavourable for all three of Perpetual’s businesses: investment, private wealth and corporate trust activity. But Perpetual has not done enough to adjust to the new realities.

The market was left unimpressed when a scheduled investment strategy briefing planned in the second half of last year was pulled with little explanation.

Then there was the decision to replace monthly disclosures of funds under management balances with quarterly disclosures, which created the distinct impression that the company wanted to cut back on the amount of bad news.

Separately, outsourcing of the private client unit’s ageing PACT administrative platform did not demonstrate a sufficient sense of urgency, while the cost savings associated with the removal of a dozen or so positions in the distribution team before Christmas also came too late for Ryan.

Still, in the wealth management chain, Perpetual is a product manufacturer with a superb brand name.

But a decade ago, when its funds management capability was gathering steam, it was up against maybe 40 other Australian equities managers. These days there are 150 managers of Australian equities, all competing for the same pool of funds whether it be from the financial planning market or the giant super funds.

These days the more integrated wealth management play IOOF has a market capitalisation 50% larger than Perpetual because it has in-house planners and platforms to help generate new inflows and protect existing ones.

Perpetual’s funds under management as at December 31 was $22.9 billion, down 2.6% for the quarter, triggering a fresh round of earnings downgrades.

Back in the heady days of 2007, when the ASX was near its peak, Perpetual had close to $40 billion in funds under management.

For the record, Perpetual says it is going to drive its existing strategy harder rather than do a complete U-turn.

I see Perpetual’s corporate trust business as the most likely to be the source of divestments in the short term but identifying a buyer for its low-margin mortgage settlements business, which is exposed to the country’s ailing housing market, is not going to be easy.

Standing back from the crowd, I see Perpetual Private Wealth division as being an untapped gold mine. Its high net worth client base is second to none.

More generally, there are reasons for great optimism about Perpetual’s long term prospects. We star fund managers believe that value-focused stock picking culture within Perpetual is easily strong enough to withstand the departure of John Sevior and this is an attribute that sets the company apart from many other less mature funds managers. Then there is the strength of its brand recognition.

Further, I have faith in the new managing director Geoff Lloyd to hasten the rate of change. The canny Lloyd knows the Australian wealth management industry intimately and, from his days running St George Bank’s wealth management operations, will know the advantages of having a more integrated offering.

Just now, among seven top brokers perpetual is rated neutral by four, a hold by two, and there is one sell note.

Yet, thanks to a loyal bunch of retail shareholders Perpetual still trades at a premium to most other wealth managers.

Maybe the days of trading at more than 20 times top-of-cycle earnings are well behind Perpetual, but we don’t subscribe to the view that the current market deleveraging has another decade to run.

Perpetual is likely to emerge from the current bear market conditions a leaner, more humble, player in Australia’s financial services industry, capable of extending its 126-year heritage.

Stewart Oldfield is a research analyst at InvestorFirst Securities.