Perpetual prepares for a dreary future
New boss Geoff Lloyd is well into his brief of stripping out the pre-crisis fat as the financial services company adapts to a sinking investor enthusiasm which has no end in sight.
"While first steps have been taken towards fundamental improvement in FY12, it was not sufficient to match the difficult environment our industry currently is in. We are attempting to control what we are able to control," he said.
When Lloyd was appointed Perpetual’s third chief executive in a year his brief from the board was to move far more aggressively on a cost base regarded by the market as inflated and develop a growth strategy. His response was a program that will strip about $50 million a year from the group’s cost base by 2015 – nearly 20 per cent of the pre-existing costs – and see about 580 positions disappear.
It hasn’t helped Perpetual, which reported a fall in underlying earnings of 7 per cent to $67.6 million and a 57 per cent dive in statutory profits to $26.7 million, that the market and industry background has remained hostile.
While the industry experience, in terms of net flows of funds under management, improved slightly as the year progressed, the harsh reality for fund managers is that the industry as a whole was and is still experiencing net outflows of funds and, given the level of risk-aversion among investors and the volatility within a sharemarket that is going nowhere, isn’t going to bounce back to its pre-crisis environment any time soon.
For all market-facing sectors the only response to the conditions is cut their cloth to suit the prevailing conditions rather than bet their businesses on a view that today’s conditions are part of an unusually protracted cycle that will eventually lead to a pick-up in activity levels.
Given the nature of the lead-up to the financial crisis and the severity of the post-crisis shocks, there is a significant structural element to what has happened in markets, and elsewhere.
It’s akin to the debate about commodity prices and the resources boom and whether the steep falls in prices and the deferral/abandonment of big projects is structural or cyclical.
No one would sensibly bet their business, or their economy, on activity and prices bouncing back quickly. Perpetual and its peers, like a BHP Billiton or Rio Tinto, have to act to protect themselves against the risk that the current conditions might be their new reality – or might deteriorate further.
That’s why Lloyd’s statement today that Perpetual isn’t going to wait for markets to turn and that it needs accelerated and more fundamental change is a pragmatic and rational assessment of what he needs to do to ensure the group is structured for the current environment, or something worse.
While the first phase of the transformation strategy is dominated by cost reductions – Lloyd announced an outsourcing of its IT functions today to Fujitsu that will deliver more cost savings and headcount reductions – the plan also involves a re-focusing of Perpetual.
Despite the stellar performance of its funds it hasn’t been able to translate that investment management performance into financial performance. The new strategy is to focus on more specialised segments of the asset management universe and partner with third party managers in areas where Perpetual doesn’t have real expertise.
Similarly, in its private wealth business, Lloyd plans a tighter targeting of high net worth customers built on advice. The underlying theme to Lloyd’s game plan is far more focus, both in terms of Perpetual’s offerings and the customer segments it addresses.
Pre-crisis it didn’t matter that Perpetual added costs and complexity and expanded into areas beyond the real core of its funds management, private wealth and corporate trust businesses – there was so much activity and the flows of funds were so great that the underlying weaknesses in the group were camouflaged.
Today, having already had one approach from private equity that it rejected, Perpetual is acutely aware that it has to realign itself with the environment. If conditions were to improve that would be a bonus. There are plenty of others in the market and within the broader economy that have already come, or are coming, to the same conclusion.