What a difference six months can make. When Platinum's first half closed at the end of December, funds under management (FUM) were around $27bn and net profit was up almost 19% against the first half of 2015. Everything seemed positive.
Difficult second half
Not cheap enough
Then things started to go wrong. In January, China’s Shanghai Composite index fell around 25% compared to its level at 31 December 2015. Whilst it has improved since then, it’s still down around 18% since the calendar ticked over to 2016. Then in June, the United Kingdom shocked the world by voting to leave the European Union.
Funds flow out
With this as a backdrop, Platinum ended the 2016 financial year with FUM of around $23bn, a fall of 15% since December as a big institutional client waved goodbye. The impact of the lower FUM was cushioned by the timing, with the biggest fall occuring in June. This meant that average FUM only fell 1% over the year, to $26bn. Fee revenue also fell by 1% to $338m, representing a flat margin of 1.31%, but other revenue fell by $13m to $7m due to lower currency gains on cash held in US dollars, so total revenue therefore fell 4% to $338m.
Combined with a 5% increase in expenses (largely driven by an 11% rise in staff costs), this meant that profit before tax fell 6% and earnings per share fell 7% to 34.2 cents – a long way short of consensus forecasts for a flat result.
|Year to June ($m)||2016||2015|| /(-)
|*excludes 10c special dividend|
With FUM already 10% below its average for 2016, 2017 is likely to see another fall in profits. It's early days, though, and July began on a positive note, with FUM increasing by $700m or 3% – but with the MSCI World Index falling 2% since the start of July the market isn’t making it easy.
Platinum has also not been helped by the performance of its funds. The flagship Platinum International Fund, which accounts for almost half of FUM, has underperformed the market over the past 1 and 5 years – by 6% and 2% a year respectively – although it remains well ahead over 10 years and since inception.
Betting on Asia
Platinum’s performance has suffered from its large bet on the Asian region and away from the US market. More than 30% of Platinum’s funds are invested in Asia (excluding Japan) and North America represents just over 20%, compared to the MSCI World Index which has less than 10% in Asia (ex Japan) and more than 50% in North America. Unfortunately for Platinum, the Asia (ex Japan) region ended down 9% in 2016 compared to the 6% growth of the United States.
Compare this to Magellan Financial Group, whose Global Fund, dominated by North America, was flat against the MSCI index over one year and has outperformed over five years and longer. A bet on Platinum is still a bet on Asia.
Ironically, the one thing that might help most in improving Platinum's relative performance would be a downturn in global markets, particularly the US – but investors in fund managers need to be careful what they wish for.
For one thing it's not clear that an improvement in fund flows would necessarily follow an improvement in performance. Managing director Kerr Neilson observes that 'performance can change remarkably quickly and within several months positive flows tend to follow', but fund flows were patchy in the five years following the global financial crisis, despite excellent five-year performance. Investors are also increasingly cost-conscious – particularly with lower returns forecast for most asset classes – and Platinum's margins stick out like something of a sore thumb.
The other point, of course, is that rocky markets tend to hit the share prices of all fund managers – even the ones that tend to perform relatively well in those conditions – so there might be better opportunities to buy the stock.
The share price is now down 43% since we recommended selling the stock eighteen months ago and 10% since we reduced our Buy price to $5.50 and declined to upgrade in Brexit Buy List. However, given the weak FUM performance, earnings are likely to fall again in 2017, so the stock doesn't look obviously cheap on a price-earnings ratio of about 17. Our preference is for Perpetual, which is on a similar PER, but has more reliable distribution and much less key man risk (although recent performance has also been poor).
We still admire Platinum Asset Management as a fund manager and are hopeful of an opportunity to buy the stock – but it will need to be at a lower price. We're shifting our Buy price down to $5 and will be watching closely. HOLD.