THE DISTILLERY: Perpetual torment

Jotters give Geoff Lloyd's Perpetual cuts a tepid appraisal, while one says the changes are less than they seem.

The efforts by Perpetual chief executive Geoff Lloyd to reconcile the fund manager’s costs with the realities of the equities markets have received a lukewarm reception from Australia’s business commentators. It should be said, however, that many criticisms of Perpetual are traceable to the mistakes of the company’s board.

Firstly, The Australian’s Criterion columnist, Tim Boreham, says the changes Lloyd has implemented aren’t as significant as the headlines might imply.

"The cost cutting – to be executed over three years – is more expansive than expected by the market, but as far as the advertised ‘transformation strategy’ goes, it's more a case of tweaking what's there already. Contrary to speculation Perpetual will continue to exist as three main divisions: Perpetual Investments, private wealth and the corporate trust (which was most favoured to be sold). 'The (corporate trust) business brings good annuity revenue to the business, which offsets our more volatile market focussed business,’ Lloyd says. Like most ‘strategy’ announcement the Perpetual announcement is vision-light. But to be fair, Lloyd was hired with the specific charter of aligning costs with the poor equities market.”

Business Spectator’s Stephen Bartholomeusz offers another perspective on the cost cutting.

"While it might not appear a radical approach, the $50 million a year of cost savings by 2015 that Lloyd says the program will deliver is equivalent to about 18 per cent of the group’s cost base. Included in the savings is the board’s gesture to the market, a 30 per cent or $500,000 a year reduction in directors’ fees that includes a 42 per cent 'haircut’ for the chairman, Peter Scott. Perpetual has been under pressure from the market – and under renewed threat of another approach from private equity – because it was seen to be carrying a far fatter cost structure than its peers while experiencing a steady shrinkage in its funds under management. It was those pressures and the perceived lack of urgency in responding to them that lead the board to truncate the tenure of Lloyd’s predecessor, Chris Ryan. Lloyd’s strategy is predominantly and understandably prioritising the cost cutting in a program that will initially shrink and simplify the group before it starts placing greater emphasis on growth strategies from 2014.”

Meanwhile, The Australian’s Richard Gluyas argues that Geoff Lloyd now has two years to turn Perpetual around.

"If he fails, the Perpetual boss will confront the real deal – a new private equity owner. The only surprise in the strategy was the magnitude of the workforce cuts, with 580 out of 1300 people to go, including 280 from the looming sale of Perpetual Lenders Mortgage Services. The cuts will help to slash $50 million, or 18 per cent, from a current cost base of between $275 million and $282 million. With Lloyd now building the company's third management team in less than two years, Perpetual has clearly been labouring with a bloated cost structure, reflecting a pre-GFC period of a decade or more when all it knew was growth.”

The Australian Financial Review’s Chanticleer columnist, Tony Boyd, foresees some upcoming market changes that will make things a little easier for Lloyd.

"The cost of allocating money to managed funds will fall dramatically and become much simpler once the Australia Securities Exchange launches the AQUA service, which will allow the trading and settlement through the ASX of managed funds and exchange-traded funds. However, the broader problem for Perpetual is the negative market sentiment towards risky products such as equities. A paper published last week by the Reserve Bank of Australia said that between 2008 and 2011 there were net outflows from households’ direct holdings of equities of about $67 billion, while holdings of deposits increased by around $225 billion, $90 billion more than in the previous three years. As a result of sharemarket declines, the share of households’ financial assets directly held in equities has more than halved from 18 per cent before the global financial crisis to 8 per cent at the end of 2011.”

And The Australian’s John Durie says Perpetual could have increased the transparency of its model that, clearly by yesterday’s announcement, is in need of repair.

"According to last year's annual report, we can deduce the Australian equities management team owns about 8 per cent of the company, so its interests are aligned with other shareholders. But just maybe some more metrics around how they are paid would be helpful, and avoid perceived conflicts between their taking the high moral ground on other companies' remuneration reports and governance issues. As good governance slowly creeps through the industry fund movement, we can expect the folk from Soul Pattinson to be asking some questions at the next Perpetual board meeting. Perpetual has led the attack on the cross-shareholding with Brickworks. When asked whether there should be more disclosure about fund manager pay, Scott confided it was a very competitive market and most shareholders were opposed to more transparency. It must depend on who you talk to.”

In other company news, Fairfax’s Adele Ferguson says Billabong International is now firmly a takeover target after investors shunned its capital raising, sending the stock down to well beneath the $1.02 offer price.

Meanwhile, Fairfax’s Insider columnist Ian McIlwraith makes the point that Kerry Stokes would not have been caught by surprise by the News Limited bid for Consolidated Media Holdings, unless his chief right-hand man Peter Gammell and son Ryan declined to share the news they would have received as CMH board members. Good thinking, Ian.

In broader market news, Fairfax’s Michael West says investors should keep an eye out for share buyback announcements. Not just because it’s the only legal way you can boost your share price and get a tax break at the same time, but that companies are under no legal obligation to actually buy shares – announcements put a floor under the share price – which is, in The Distillery’s view, hilarious.

Elsewhere, Fairfax’s Michael Pascoe says a misinterpretation of China’s PMI figures last week, which indicated 48.1 points (below the line between contraction and expansion) cost global investors that sold dearly.

And finally, Fairfax’s economics Tim Colebatch illuminates his readers to the reality that the Australian government is, proportionately, one of the three smallest governments in the western world.

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