American novelist Paul Theroux once said ‘it’s usually expensive and lonely to be principled’. Perpetual’s chief executive Geoff Lloyd might agree after announcing a 4% fall in underlying profit.
The investment company is unapologetically focused on value. But with value hard to find, its managers have been sitting on their hands more than they would like and the performance of its funds has been sluggish.
Fund performance down
Negative fund flows
Raising buy price
This was on show at Perpetual Investments — which manages the groups umbrella of managed funds. Although most of its flagship funds are still rated in the first or second quartile over three years and more, 11 out of 15 are now ranked in the third or fourth quartiles over one year. This, together with fragile equity market sentiment, no doubt contributed to Perpetual Investments' first first net fund outflow since 2013, of $0.3bn.
The greater impact, though, was from market falls and distributions, which knocked a further $0.5bn from funds under management (FUM), leaving average FUM 7% lower over the year at $30.0bn. This in turn led to a 5% fall in revenue, and almost $2 million of cost reductions and higher than average performance fees were not enough to prevent profit before tax falling around 6 per cent.
|Year to June 30||2016||2015|| /(–)
|Perp. Inv. PBT ($m)||118||126||-6%|
|Perp. Priv. PBT ($m)||34||38||-9%|
|Perp. Corp. Trust ($m)||34||31||9%|
|Group costs ($m)||-9||-6||47%|
|U'lying PBT ($m)||178||189||-6%|
|U'lying net profit ($m)||128||134||-4%|
|U'lying EPS (cents)||276.1||289.6||-5%|
|*$1.30 dividend ex date 5 September 2016|
Market movements and distributions are beyond Perpetual's control – and will cause profits to bounce around. But fund performance and flows will require watching. Ironically, a market setback might be just the tonic for Perpetual's fund performance – but shareholders should be careful what they wish for, as it would also no doubt affect the company's earnings and share price in the short term.
Elsewhere, Perpetual Private added 100 new clients but saw average funds under administration fall from $4.5 million to $3.6 million. An 8% increase in revenue from its non-market-related businesses (such as tax and accounting advisory) was not enough to compensate from lower market-related revenue and increased costs, and profit before tax ended the year down 9% at $34 million.
Perpetual’s corporate trust business had a more successful year. Revenue increased 6% and profit before tax increased 9% as funds under administration increased 11% to $621 billion at June 2016.
Taking a steady approach
Markets are unpredictable in the short term, which means you have to live with some ups and downs when investing in fund managers. Over time, though, shares tend to do well, particularly when selected according to sound value investing principles. Over time we expect these trends to support Perpetual. The company is also less reliant on individual stars than other value-based managers such as Magellan Financial Group and Platinum Asset Management. We also expect to see further growth in the Perpetual Private and the Corporate Trust business. With markets already higher than their average level for the 2016 financial year, we're hopeful of a return to earnings growth in 2017, although it's very early days.
The stock is up 19% since we reviewed the interim result back in February, but that's supported by a 14% rise in the All Ordinaries Index. With that in mind we're increasing our Buy price to $50 (and our Sell Price to $70), which is just enough to keep the stock in buy territory. However, at current prices and given the sensitivity to market movements we wouldn't recommend having the full 7% maximum recommended weighting. BUY.
Note: The Intelligent Investor Growth and Equity Income portfolios own shares in Perpetual. You can find out about investing directly in Intelligent Investor and InvestSMART portfolios by clicking here.