Platinum cuts fees

Investors have given a crude assessment of fee cuts announced by Platinum Asset Management last week, slashing the share price by about 13% since the announcement, not far from the pro forma earnings impact (based on the assumption that it will have no impact on fund flows, but we'll come to that).

We take a more relaxed view. Although we considered the impact of fee cuts in our last article (see Platinum ploughs a lonely furrow from 9 March 17), it was mostly as an academic exercise and we were as surprised as anyone by the announcement. But it was the need for the fee cuts that was alarming us, not whether they were actually delivered – and now we've got them, the impact is more subtle on Platinum's long-term value.

The basic fee reduction is of 10%, from 1.5% (including admin costs) to 1.35%. Managed fund investors will also be offered a performance fee option in line with that available on Platinum's two listed investment companies (Platinum Capital and Platinum Asia Investments), that is a management fee of 1.1% plus 15% of outperformance above benchmark.

Cost reductions

Interestingly, presumably in an effort to head off suggestions that it is discounting the price (and perhaps therefore the perceived value) of its services, management said that the fee cuts were intended to pass on to customers the benefit of reductions in the ‘costs associated with accessing international markets', which have come down since Platinum began operations in 1994. No doubt this is true, but in the absence of external pressure we suspect Platinum would have been happy to continue pocketing the expanded margins.

Also in the announcement came news that Platinum will launch two new exchange traded managed funds linked to the Platinum International Fund and the Platinum Asia Fund (its two biggest funds, accounting for almost two-thirds of funds under management).

You can interpret these moves in a couple of ways: the first is that it might suggest that the pressure on fees and to be more flexible on distribution is greater than investors had feared; the second is that it's a welcome first step in addressing the issues. Possibly it's a bit of both.

The fee cuts won't take effect until the start of the 2018 financial year, for which management estimates – all things being equal – that they might knock around 9% off revenues. The hope is that this might be partially offset by increased inflows into the new ETMFs and existing funds, but it's probably more about staunching outflows at the moment.

Valuation unchanged

If we assume that the full 9% revenue impact flows through, then it will knock earnings per share (EPS) down by about 11%, to 27 cents – which, as is often the way with these things, is close to the market's initial reaction.

Our view is that this was inevitable (although sooner than expected) and that more will in fact ultimately be needed. Although it raises the prospect that the fee pressures are even greater than we had feared, this is offset by the demonstrated willingness to do something about it. As a result, our valuation doesn't change by much.

The stock is close to our Buy price of $4.30, which puts it on a price-earnings ratio of about 16 times 2018 EPS of 27 cents (after the fee cuts and assuming funds under management average $23.2bn – their level at the end of March). Ultimately, though, we'd expect the fee margin to fall further, perhaps to earnings per share in the low twenties of cents on a pro forma basis, giving PERs of closer to 20 (again based on our $4.30 Buy price). That, though, would start to look like an attractive price to pay for what remains a high-quality fund manager. A little cheaper and we'd be minded to upgrade, but for the time being we'll stick with HOLD.